Financial Post - October 6, 2003

Ralph Klein used to joke during British Columbia's NDP reign that the B.C. premier was the most productive member of the Alberta Cabinet, helping to drive the best and brightest out of B.C. and into Alberta.

Jason Clemens, Director of Fiscal Studies at the Vancouver-based Fraser Institute, is proposing a new joke for Mr. Klein, in light of last week's election of a Liberal Government in Ontario. "I think the new joke is that the number one Cabinet minister for Premier Klein is [Ontario Premier-designate Dalton] McGuinty, because of his view of Corporate Taxation and Corporate Development," he said.

Indeed, Alberta, whose stellar business climate could get even brighter thanks to expectations of a rich budget surplus this fiscal year, stands to gain the most from what many say will be Ontario's new tax-and-spend regime. The widening gulf between the two provinces' tax burdens and business environments can only mean that Ontario businesses and individuals will look hard at migrating to Alberta, Ontario's top competitor as the country's growth engine. "There has been somewhat of a tide in the last 10 years for head offices to move westward," said University of Calgary economist Frank Atkins. "This may bring on a second surge of head offices out of there."

Mr. McGuinty has pledged to raise corporate taxes in Ontario for the first time in 18 years as his primary means of raising new revenue. While he promised to maintain personal, consumer and small business taxes at current rates, he said he will roll back the first phase of the Tories corporate tax cuts, resulting in an increase of the corporate tax rate from 12.5% to 14%, rather than reducing it to 8% by 2006. He said the manufacturers and processors rate will increase from 11% to 12%. And he said he will cancel the Progressive Conservatives' planned 10% cut to the 0.3% capital tax.

The Canadian Council of Chief Executives, Canada's senior business organization, warned on Friday: "The economic evidence demonstrates clearly that raising this form of taxation has a disproportionate cost to future economic growth, and returning the province's corporate tax rate to 14% from 12.5% would position Ontario as a higher-tax jurisdiction than Quebec, British Columbia, and New Brunswick as well as Alberta."

In contrast, the corporate tax rate in Alberta is expected to slide to 8% by 2006 from the current 12.5%, subject to affordability, making it the lowest in Canada.

According to the Fraser Institute, Alberta will have an effective tax rate on capital - including all business taxes - of 16.3% in 2006, while the comparable rate in Ontario will be 23.7%, even before accounting for the Liberal's proposed increases in Ontario. Mr. Clemens said Mr. McGuinty's corporate policies effectively put "Alberta in a league of its own now. Come 2006, there will be no one else even close to Alberta. Full stop."

Alberta's tax advantage doesn't end there. Even as Mr. McGuinty was talking about raising business taxes, Mr. Klein was musing last week about personal income tax breaks because Alberta is anticipating a surplus of $1.7-billion during the current fiscal year because of high oil and gas prices. Alberta collects a significant portion of its revenue from oil and gas royalties and land sales. Alberta has a flat personal income tax rate of 10%, compared to a graduated tax system in Ontario ranging from a low of 6.05% to 17.4% for top earners. Ontario also has two layers of surtax. Alberta has no sales tax, compared with 8% in Ontario. And Alberta has no capital tax.

Along with decreasing taxes, Alberta's other options for its budget surplus are: paying down its long-term debt, which already stands at a meagre $4.7-billion (Ontario's debt was $110.2-billion last year); investment in infrastructure, or a combination of the three. All would contribute to an improving business climate in Alberta, while Ontario is looking at its first budget deficit in five years.

Moving headquarters is not an easy step. But it's certainly getting easier, thanks to technology. Banks and other financial institutions, manufacturers, and certainly Toronto-based Imperial Oil Ltd., the only major oil and gas company not based in Calgary, are among those expected to question whether they can justify to their shareholders their continued head-office presence in Ontario. "In this day and age, it's not much distance between Toronto and Calgary," said top Calgary lawyer Doug Black, vice-chairman at Fraser Milner Casgrain LLP. "The pressure on firms is now so intense in terms of return to shareholders, that any place that you can trim and streamline operations, make operations more efficient, they've got to do it."

Mr. Clemens said Alberta also stands to gain from an increase of its share of investment generally aimed at Canada, and from corporations shifting their profits to Alberta to benefit from the lower tax rate by using transfer pricing and other mechanisms. "What this means for the [Ontario] government is that even with a higher rate in Ontario, I don't think it's a given that they are actually going to raise higher revenues," Mr. Clemens said. "And in Alberta with lower rates, I have no doubt they are going to increase the revenue take." Indeed, Alberta's picture is getting so much brighter you have to wonder if Mr. Klein shouldn't do more than save a seat for Mr. McGuinty at his cabinet table. He could get pro-active, and launch an outright offensive in Ontario to play up the Alberta Advantage.

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