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“incentives” for business and a general tightening of the tax net. In fact, many of its proposals were withdrawn before being implemented. But the budget was an example of a general movement, in Canada and elsewhere, to achieve a fairer system by removing perceived loopholes and unjustified incentives. This trend has continued fitfully with the adoption of a general anti-avoidance rule in the tax statutes and continued efforts to plug perceived abuses in the system. More recently, new rules requiring greater disclosure of tax-planning schemes have been introduced.
During the 1980s, there was a growing realization that Canada’s tax burden and the tax structure for business income was undermining economic growth and that it was necessary to stabilize the unwieldy corporate tax base. The idea of lowering rates and moving to a new more neutral corporate tax base was consistent with the philosophy adopted by the new Mulroney government elected in 1984. With accelerated depreciation and other special preferences, many profitable companies were not paying corporate taxes, and a number of them engaged in practices to transfer their losses to taxpaying corporations. In May 1985, Michael Wilson, the new minister of finance, introduced a revenue-neutral corporate tax restructuring. The proposals included a reduction in the federal corporate rate (eventually from 36 to 28 percent) with the elimination of a general investment tax credit and inventory allowances, and a scaling back of corporate capital cost accelerated deductions. The first phase was adopted in the May 1985 budget.
In 1986, the Reagan government enacted a major tax reform in the United States with the aim of substantially lowering corporate rates to 35 percent and achieving a more neutral tax base. The federal government in Canada then decided that it needed not only to carry out the second phase of corporate tax reform as originally planned but also to undertake personal tax reform with the aim of lowering the federal rate. The Canadian reform led to lower personal income tax rates, a broader personal income tax base, and fewer tax brackets with many deductions turned into tax credits (generally based on the low-income tax rate and the qualifying amounts). The government argued that the use of tax credits increased fairness by equalizing the value of a deduction for the rich and the poor, although a significant reason for introducing the credits was simply to enable the government to cut personal income tax rates as much as possible.