OTTAWA â€” Corporate Canada is bracing for the latest economic challenge out of Washington: a tax-cutting plan for U.S. businesses that many fear would pose a considerable threat to Canadian competitiveness as well as Ottawa’s bottom line.
The White House announced a tax-reform package Wednesday that included a proposal to significantly slash the top U.S. corporate rate from 35 per cent to 15 per cent.
But concerns the plan would inflate U.S. federal shortfalls mean it could face a difficult road to implementation.
Still, if it were to come into force, tax such a “dramatic” reduction would push the U.S. effective corporate rate about seven percentage points below Canada’s effective rate, said tax expert Jack Mintz.
Mintz said the change would erase Canada’s current tax advantage over the U.S. of about four percentage points, once multiple factors â€” including federal and provincial rates â€” are factored in.
That difference, Mintz warned, would entice businesses to move their investments and profits south of the border, starving public treasuries in Canada of up to $6 billion per year in revenues.
“People are going to take money out of Canada and put it into the U.S.,” said the University of Calgary professor, who has closely studied the issue.
“And it’s not just the American companies. There will also be Canadian companies with operations in the United States…. So, this is a real negative for Canada, no question.”
The U.S. tax-cut proposal is just the latest element of an economic agenda from the Trump administration that could end up sideswiping their northern neighbour.
Earlier this week, President Donald Trump slapped a duty on softwood lumber that will affect imports from Canada. And on Wednesday, White House sources were telling U.S. media outlets that they are contemplating a plan to pull out of NAFTA.
However, the White House said late Wednesday that Trump has told the leaders of Canada and Mexico that he will not pull out of NAFTA and that the leaders agreed to “proceed swiftly” to enable the renegotiation of NAFTA to the benefit of all three countries.
Taken together, the uncertainty surrounding Canada’s biggest trading partner has already had a chilling effect on investment â€” and that, on its own, has already had a negative economic impact.
“Many are just sitting on cash waiting to see what happens,” John Manley, head of Business Council of Canada, said of Canadian firms.
The Trudeau government, Manley added, should keep an close eye on tax-competitiveness issues and ensure it has a contingency plan ready to deploy, if necessary.
Manley, a former Liberal finance minister, said corporate decisions are often made very quickly â€” and once an investment is lost, it doesn’t come back.
Manley was in Washington on Wednesday to meet with members of Congress in hopes of learning more about the White House’s intentions on some the most worrisome economic issues for Canada.
In summary, he said no one really knows.
“The president has demonstrated that what he says publicly he doesn’t always intend to have taken literally, and that’s just his style,” Manley said.
“And so, I think we have to be careful about overreacting to some of the stuff that comes out.”
He said it’s also important to recognize that Trump’s ambitious tax proposal is a long way from becoming law because it would likely cost the U.S. government trillions of dollars of lost revenue.
Mathew Wilson, senior vice president of Canadian Manufacturers and Exporters, said the organization has been urging Ottawa to seriously consider easing its own regulations and to ensure the effective corporate rate remains competitive with the U.S.
Canadian investment has been “terrible” under current conditions and a major tax cut in the U.S. would only make things worse, Wilson said.
“If companies aren’t investing in Canada, the economy just grinds to a halt,” said Wilson, whose organization represents more than 10,000 companies.
“It’s got to be a top-level concern and if we don’t get the economic fundamentals right in Canada, to have a competitive investment climate, we’re in deep trouble.”
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Andy Blatchford, The Canadian Press