What’s up if the corporate rates drop?

Tax Matters for Canadian Businesses

Tax Matters for Canadian Businesses

Your Business, Your Money: tax advice to help you keep more of what you earn

With Canadian top tax rate over 50%, a dollar of tax saved is now more than two dollars earned. Each month we translate the complexities of tax news into actions for Canadian businesses. This month we continue the series on cross-border trade, recognizing the opportunities for Canadian businesses to benefit from the low Canadian dollar, favourable tax treaties, and the booming US economy right next door.

What’s up if the corporate rates drop?

U.S. corporate tax rates are apparently dropping – what does that mean for your business?

February, 2017

Along the campaign trail, Donald Trump promised a drastic cut to the U.S. corporate tax rate, which he viewed as a way to stimulate the economy and create more American jobs on American soil. The current corporate tax rate in the U.S. is approximately 40%, including federal and state income tax, which is one of the highest among developed nations worldwide. The U.S. system is also set up so that corporations south of the border are also taxed on worldwide income, as long as the profits return to the U.S., which has historically encouraged more companies to avoid such a levy by piling cash overseas.   

In pre-inauguration times, Trump said he would cut the corporate tax rate to 15%; others speculate it would be more realistically lowered to 20%. Regardless of which number is formally put forth, with the Republican Party as the majority in both the House of Representatives and the Senate, it is likely that such reform might be higher on the agenda than other issues. If the U.S. were to lower their corporate tax rate to a number between 15 to 20%, which generally would be lower than the Canadian combined federal and provincial general corporate tax rate of approximately 26%, what would this mean for businesses on both sides of the border? 

Here’s what’s being said: 

  • The overall impact on any single company will depend on what happens to existing corporate deductions, such as depreciation of research and development spending, and other potential offsets to a company’s overall tax bill.” – Financial Post, December, 2016
  • Tax breaks to encourage firms to repatriate their foreign cash holdings have tended to overwhelmingly benefit shareholders, largely through share buybacks… Conversely, these deals have had little impact on long-term investment or employment.” – Business Insider, December, 2016
  • “Trump's proposed corporate tax rate of 15 percent would significantly undermine the appeal of inversions, which had already become less tenable after a series of rules issued by President Barack Obama's Treasury Department. Even if Congress winds up targeting a rate closer to 20 percent, that would put the U.S. in line with Britain.” – Bloomberg Gladfly, November, 2016 

The Richter take:

For certain companies, a drop in the U.S. income tax rate may mean that more business activities should be located in the U.S. in order to allow for a reduction of the group effective tax rate and significant tax savings. In addition to the reduction in the corporate income tax rate, other factors need to be considered, such as, for example, the expected volume, growth and profitability of the U.S. business over time.

Without a concrete indication of what the rate will be, or when this rate will be enacted, it’s hard to say how this will affect businesses in Canada, or those that do business in or with the United States. Many say the biggest winners in such a rate drop would be shareholders of large companies. In years’ previous, it was found that “for every $1 that companies repatriated under a 2004 tax holiday, shareholder payouts increased by 60 cents to 92 cents.”[1] This could affect Canadian businesses, should U.S. corporate leaders decide to repatriate more funds to the U.S.  

The next consideration is how the Canadian government may respond to such a rate drop. Prime Ministers Chrétien, Martin and Harper had all lowered the corporate tax rate in Canada so our country could remain competitive globally. It worked. Companies like Burger King moved their headquarters to Canada following their merger with Tim Hortons, and now benefit from the lower tax rates.[2]

As businesses and countries around the world wait for any official movement on this topic, we advise Canadian businesses to monitor these developments closely and continue to check back with us for further up-dates, analysis and insights.

[1] https://www.bloomberg.com/gadfly/articles/2016-11-09/trump-corporate-tax-plan-may-deter-inverters-but-not-cash-hoards

[2] http://www.theglobeandmail.com/report-on-business/rob-commentary/donald-trumps-tax-plan-threatenscanadian-competitiveness/article32832824/

Read more:
What does the future of TPP mean for your business?
Is NAFTA next?
Should we really expect an influx of U.S. citizens in Canada?

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About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.

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