Uncertainty over the policies of the Trump administration in the U.S. may prevent some Canadian businesses from moving south to take advantage of his proposed 20% corporate tax rate, analysts say.
Industries like manufacturing that require large amounts of investment and infrastructure will not able to change their business location strategy and move quickly. As a result, Canadian businesses in these sectors are likely to stay put in Canada, said Steeve Mongrain, professor of economics at Simon Fraser University.
Agile industries like the film business that relocate regularly are more likely to leave Canada than are slower-moving sectors that require a more permanent infrastructure base, Mongrain said.
“Industries where it is easy to pack up and go and re-pack up and go if something changes are going to be affected by Trump’s tax proposal,” said Mongrain. “If you’re deciding to build an automobile plant, that’s an entirely different story.”
Companies eyeing a move to the U.S. will want to ensure that Trump’s corporate tax rate cut won’t simply be undone by a new administration or Congress, he said. Industries like film production, which are highly mobile, are able to operate in the U.S. while taxes are low and maintain the flexibility to relocate quickly if taxes are increased.
The proposed legislation could be a welcome change to both Canadian and U.S. businesses who have spent the past six months trying to decipher Trump’s minimal and cryptic tax proposal. In late April, the White House released a single-page report consisting of 19 bullet points. Those bullet points were later used to craft the house Republican’s tax bill released on Thursday.
The bill lowers the marginal U.S. corporate tax rate from 35% to 20%, five percentage points higher than the suggested 15% originally proposed by the White House in April.
Businesses operating in the U.S. can be subject to vastly different tax rates depending on the loopholes, deductions and credits they are able to take advantage of. While the marginal federal corporate tax rate is 35%, some businesses can have significantly lower effective tax rates. While some U.S. companies can pay as much as 40%, others can receive a large tax rebate.
Businesses operating in British Columbia pay a combined federal and provincial tax rate of 26%. Canada’s corporate tax rate has encouraged some U.S. businesses, including Burger King, to move their headquarters to Canada. However, Canadians will likely not have to worry about the King moving home just yet.
A provision in the bill, not previously floated by the White House, grants businesses the ability to immediately expense the full costs of capital assets. In Canada, capital assets are currently deductible at rates prescribed by the Income Tax Act over the lifetime of the asset. For equipment, the major portion of its cost is deducted over four to eight years. For buildings, the deduction can be over 25 to 50 years depending on its use.
“Most businesses are certainly going to wait to see what the Canadian government does,” said Robert Keats, executive director and co-founder of cross-border wealth management firm KeatsConnelly.
Keats said the Canadian government will likely respond by lowering its corporate tax rate to negate any benefit that companies could obtain by moving south.
Concern about near-term reversals of political fortune in the U.S. is only one reason Canadian companies may be hesitant to move south. According to Mongrain, many companies are also worried about the long-term feasibility of proposed tax cuts and whether the U.S. will be able to continue to afford them in the future.
“These tax cuts will lead to significant deficits and an accumulation of debt; debt and deficit are basically a future tax liability,” he said. “In that sense, a firm that has a long-term strategy potentially sees that taxes might increase in the future.
A lower tax rate is not the only incentive for Canadian businesses to move south. Keats said a major attraction for business is the low repatriation tax rate – the amount of taxes paid on profits made in a foreign country when they are brought back into the U.S. The bill proposes a one-time repatriation rate of 12% that would allow businesses to bring profits back to the U.S. for a one-time, discounted tax rate. Illiquid assets will receive an even lower rate of 5%.
One of the fundamental changes to the U.S. tax code is the proposal of a territorial tax system where profits are taxed only in their place of origin. This could be enticing to Canadian businesses that are considering international expansion By expanding first to the U.S. and then overseas, Canadian business would be able to take advantage of this territorial tax system. Currently companies pay taxes in the country where the profits were made and get a tax credit for that amount to reduce their U.S. taxes on those profits.
