Late in December 2017, US President Donald Trump signed into law a significant tax reform package that included a dramatic cut to the corporation tax rate from over 35% to 21%. All eyes are now on Ottawa to see how or if Canada will (or should) follow suit.
Canada’s economy is invariably tied to the US, regardless of policy — US business cycles are usually felt north of the border. Policy changes, however, generally do not cross the border. Socio-economic perspectives are very different in Canada than in the US; e.g., Canadians believe in our healthcare system even with its faults while Americans have resisted any semblance of healthcare for all. And until this recent tax cut in the US, Canadian corporate tax rates were much lower.
Will Canada Eventually Follow Suit?
The Canadian federal government has not given any indication of plans to follow the US lead on business tax cuts. On the contrary, economists and insiders, including Canadian parliamentary budget officer Kevin Page, have stated that it is unlikely Canada will try to match US tax cuts.
Won’t Keeping Taxes the Same Make Canada Less Competitive?
It depends on how one looks at the situation. Yes, lower tax rates in the US may entice some businesses to set up shop (or return home, as is more likely the case) to the US initially. On the other hand, tax cuts are projected to significantly increase the US long-term deficit even with expected cuts to core social service and infrastructure spending. With this tax package, the long-term prognosis for the US economy remains uncertain at best.
Canadian corporate taxes are re-invested in programs that promote long-term growth of the country and economy, including environmental sustainability programs, social support, healthcare, and education. These programs tend to not only increase quality-of-life of the business owners, but also improve the local talent pool and make the country more enticing for prospective employees. Canada rode out the global financial crisis of 2008 in pretty good shape. And while the dramatic decline in global oil prices over the past few years hurt some provinces worse than others, Canada’s economy has withstood the challenges.
Does This Mean I Should Open a US Branch Now?
While US branches may now operate with more favorable tax rates than in Canada, there are still a great number of considerations when looking into cross-border expansion. After all, the tax tail can’t wag the dog!
To help manage your expansion into the US, we strongly encourage you to consult with a qualified corporate tax advisor with significant cross-border experience.
If you have any questions about expanding to the US, contact our cross-border and international business experts today. If you already have US branches and would like to know how the new US tax system will affect you, contact one of our tax specialists for a complimentary consultation.