Tax cuts might affect IT spending

IT industry watchers are divided over the potential effects the corporate tax cuts announced earlier this week might have on future IT investments by Canadian businesses.

In its recent mini budget, the federal government promised it will reduce the corporate income tax rate to 15 per cent by 2012. It will start in 2008 with a one-percentage-point reduction. Small businesses will have their income tax rate reduced to 11 per cent in 2008. Finance Minister Jim Flaherty has said the feds are reducing taxes to help stimulate the economy and create jobs.

The reductions will bring Canadian corporate income tax down by one-third, making it the lowest among the major industrialized economies.

It will, for instance, put Canada’s corporate tax rate 12 per cent below that of the United States, said John Reid, president of the Ottawa-based Canadian Advanced Technology Alliance. He said that the tax breaks are in line with CATA’s goal for an innovative nation.

“We need to create an attractive brand for Canada, and an overall tax package that can be used to present and brand Canada as a highly competitive nation,” said Reid.

Creating these lower tax rates is a step in the right direction, according to Reid. “This will be very beneficial in encouraging companies to grow their business. And since technology is an important part of growing one’s business, this is a positive addition to the IT market.”

Toronto-based research firm IDC Canada managing director Vito Mabrucco, however, said, “Income tax, and tax in general, is not really supposed to be a part of investment decisions.”

But there are other tax reforms that he would like to see implemented that would further aid IT investments. He said, “People are more affected by appreciation schedules for technology. If you could write it off faster, you could gain faster tax benefits.” This could aid in luring both domestic and foreign investment. Said Mabrucco: “Canada is lagging behind the U.S. in the intensity of its (IT) investments, so there needs to be further incentive to invest in IT.”

The continuing rise of the Canadian dollar will also provide a much more concrete reason for people to invest in IT than the tax cuts, said Mabrucco.

Another way to improve IT investment, said Reid, would be a harmonization of the provincial tax systems.

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