5.3.3.3 Pros and cons of the Canadian system

A positive element of the Canadian system is the fact that it is relatively uniform, due to the tax base harmonization. However, it still gives flexibility to the provinces, as they have the possibility to set tax rates and credits. Furthermore, the system effectively prevents double taxation.1 Additionally, the one-stop-shop mechanism seems positive for taxpayers.2

A clear negative aspect of the system, however, is the fact that no consolidation is applied for the different legal entities within a group. This can lead to tax avoidance strategies, as a taxpayer can ‘elect’ whether or not formulary allocation is applied. The differences in tax rates can also lead to income shifting. Economic analysis shows that, because the income is not consolidated, firms may use profit shifting techniques, for example intra-group loans, with an aim to reduce corporate taxes at the subnational level.3 Moreover, it may intensify tax competition.4 Additionally, an apportionment system which – like the Canadian system – is limited to consolidating domestic income, requires the use of ‘regular’ transfer pricing methods as well as formulary apportionment.5