Canada Losing Out Amid US Tax Changes

Canada Losing Out Amid US Tax Changes

Investment is heading south amid Trump tax cuts, says leading bank chief.

The Canadian government is under pressure from business leaders to respond to US tax cuts, according to a recent Canadian Press interview with Royal Bank of Canada president Dave McKay, who stressed that capital was leaving in “real time.”

McKay said that a “significant” investment exodus to the U.S. is already underway, especially in the energy and clean-technology sectors.

He also believes that Canada risks suffering a loss of talent as well, meaning the next generation of engineers, problem solvers and intellectual property could be created not north of the border, but south of it instead.

“We would certainly encourage the federal government to look at these issues because, in real time, we’re seeing capital flow out of the country,” McKay said.

“We see our government going around the world saying what a great place Canada is to invest — yes, it is a great country, it’s an inclusive country, it’s a diverse country, it’s got great people assets.

“But if we don’t keep the capital here, we can’t keep the people here — and these changes are important to bring human capital and financial capital together in one place.”

The investment landscape in Canada has already been affected by uncertainty regarding the ongoing renegotiation of the North American Free Trade Agreement, or NAFTA.

But some analysts point to Donald Trump’s recent tax cuts as potentially having more impact, fearing that heavy US corporate tax cuts will eliminate Canada’s advantage.

McKay believes that Canada’s competitiveness problems go beyond what is happening south of the border, pointing to a change in the law that allows US firms to immediately write off the cost of new machinery and equipment.

The change allows firms in all industries to expense the full cost of new equipment. In comparison, Canada has a two-year write-off for equipment for just the manufacturing and the processing sectors.

Although the Canadian business community pressured federal Finance Minister Bill Morneau to take steps in his February budget to address the competitiveness concerns, their efforts went unrewarded. Instead, Morneau has sought to defend the budget against complaints it didn’t do enough to protect Canada.

John Manley, president of the Business Council of Canada, told CBC that the issue of competitiveness was “absent” from the federal budget.

“We’re always in this difficult competition to attract investment and to retain investment — and it’s not to be taken lightly because investment can move quickly,” Manley said.

BMO chief economist Douglas Porter told CBC it’s too early to draw such conclusions, but the fact the Canadian equity market and currency have both been on the weak side this year supports the possibility that capital is leaving the country.


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Paul Imison
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