Is Your Business About to be Hit by US Tax Policy?
Focusing on the overall impact of US tax policy on Canadian businesses, here Rhonda Sisco, US Corporate Tax Consulting Leader at Grant Thornton LLP in Toronto, tells Lawyer Monthly readers all about the potential impacts, both direct and indirect, of the expected US administration’s reviewed policies, in what Rhonda describes as a straightforward tax philosophy with complex repercussions.
Preparing for the storm
Canadian companies can expect a flurry of US tax policy changes.
Although many of the specific details remain unclear, significant changes to US tax legislation are definitely on the way under the new Trump administration. With his clearly stated mission to bring jobs and business back to the country, President Trump is planning to introduce a number of policies essentially designed to lower tax rates across the board.
As far as business and the economy are concerned, Canada can expect to be significantly impacted by the Trump administration’s anticipated changes to US corporate and personal tax rates, overall changes to the US tax system and a potential shift from an income tax to a VAT-like tax referred to as a destination-based cash-flow tax. In order to support “America First,” a border tax is also being discussed to ensure the intended effects of the VAT-like tax. In this shifting landscape, what measures will have the most significant impact and what should executives across the country be focusing on as they consider how to respond?
Tax changes directly impacting business and the economy
Canadian companies will be most concerned by tax changes that directly impact operations, earnings, trade and repatriation of financial assets, as well as the overall economic and competitive environment. For example, potential changes to how US companies’ foreign profits are taxed could lead many US headquartered corporations to repatriate cash from Canada, which may lead to reduced investment in Canadian operations and possible Canadian job losses. Should skilled Canadian workers follow the jobs across the border, we could see a “brain drain”—and resulting negative effects with which we’re already familiar.
Moreover, tax mismatches could result which, while creating some opportunities, could also create many pitfalls for those not closely following the changing environment.
Border tax implications
The US plan is to tax all goods and services entering the US while avoiding taxing goods or services exiting. This “destination tax,” designed to keep manufacturing jobs in the US, could negatively affect Canadian businesses that currently leverage trade agreements to sell and ship to the US “tax-free.”
Personal Income tax changes will affect business as well
In Canada, the combined effect of federal and provincial taxes puts the top marginal tax rate for high-income earners over 50% in six provinces. Under the new US plan, the top personal rate—already lower than Canada’s—could decrease still further from 39.6% to 33%. A newly-lowered top US federal tax rate, combined with a strong US dollar and recent Canadian tax increases on high-income earners, could make the US more attractive to highly-skilled Canadian workers—and ex-pat US citizens—potentially compounding the talent drain.
The federal government would face pressure to move in similar directions to the US, not only to retain investment and jobs, but simply to reap the gains of having a tax system aligned with that of our largest trading partner. One possible result could be our federal or provincial governments considering lowering our top tax rates to be more in line and more competitive with the US.
A straightforward tax philosophy with complex repercussions
Ultimately, the US plan comes down to reducing taxes, broadening the tax base and simplifying tax filing, with Trump’s promise to reduce the corporate tax rate having the biggest effect on Canada. If any or all of these “America first” measures are implemented, it could significantly impact Canadian businesses. Though the measures could spur on US economic activity that Canadian companies could significantly benefit from, certain of the tax measures may be harmful for Canadian exporters and may lead to a loss of investment in Canada and a loss of top talent to the US
Canadian companies will be facing a new economic reality when it comes to doing business in the US, conducting trade with the US and staying generally competitive with a country planning to substantially trim down both personal and corporate tax obligations.