The US Senate passed Trump’s tax cut bill this past Friday, with the President signing it into law this morning. The upcoming tax cuts may have possible ramifications for the Canadian economy and Canadian investors.
The big headline in the news is the reduction of US large corporate tax rate. This reduction will reduce the tax bracket from 38% to 21%. The current 38% US corporate tax rate can encourage US corporate executives, who are paid on short term profits, to close US factories and relocate production in lower tax jurisdiction’s such as Canada or China. While the differing tax rate between Canada and the US has now flipped back in US favor, it is not likely a drastic enough difference to cause US corporations to close Canadian factories. However, US based companies will be slower to expand or open new factories in Canada.
For example; Burger King recently purchased Tim Hortons and merged their international division with Tim Hortons (in Canada). Their rationale was to save $200 million a year in taxes from the Burger King’s global operations. Tim Horton’s head office was enlarged to implement the international expansion. This raises the question; will they continue operations in Canada or will they relocate back to the US to save even more tax on their global operations?
According to Bloomberg, the freshly introduced tax bill reduces tax rates that apply to multinational corporations, like Apple, who have accumulated offshore earnings. Currently, profits from U.S. multinational operations are taxed at 35%. U.S. companies that have revenues from outside the U.S. can opt to have those profits left in offshore jurisdictions and not taxed until they bring the foreign earnings home.
The new bill contains a lengthy section that has no direct mention of the rates, but it is expected that they will be around 15.5% for cash and 8% for less-liquid assets. This could be quite significant because there are reports that overseas assets available to bring home are in the 3 trillion-dollar range. If a portion of these assets are repatriated back to U.S. soil, this will have a significant impact on the supply and demand equilibrium. There will likely be some unintended consequences for the Canadian economy.
Small Business Taxation
Changes have also been made to the US small business tax rates. Senate approved a reduction in corporate tax rates, so total profits under $1M have a tax rate of 15% and over $1M in taxable income will be subject to a maximum of 25%. There are some limitations to the new rates, which will be discussed at a later date.
The U.S. small business tax rate reduction will have a significant and long-lasting impact on us in Canada. The Canadian government seems determined to press ahead making changes to small business taxation as they need the extra tax revenue. A successful Canadian entrepreneur, who is incorporated, earns more than $500,000 taxable income will now have a distinct disincentive to staying in Canada. Their options are to stay in Canada and be subject to a tax rate of 50% (apx.) or relocate their business to US and be subject to a maximum of 25%. As a business owner, if your products or services are transferable and you face higher tax rates, energy costs, and added carbon taxes effects, then the decision to move becomes a little easier.
Complex tax situations like the one presently unfolding force business owners to learn and adapt. We can assure you that the legal, accounting, and financial planning industries are developing an array of possible solutions to the ever-changing taxation burden here at home in Canada. Your Forbes Wealth Management team is continuing to monitor the developing situation.