Canada needs to act fast to counter U.S. corporate tax cuts, expert says

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While some might think it prudent for Canada to take a wait-and-see approach before reacting to U.S. President Donald Trump’s economic plan, at least one expert believes the Trudeau government needs to be ready to act fast.

“There’s no question the Canadian government should seriously consider the impact these changes in the U.S. are going to have and act appropriately,” Walid Hejaz, associate professor at the Rotman School of Management told Global News.

There are at least two parts of Trump’s plan which could cause companies to take a serious look at opening up shop in the U.S.

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The first would be the corporate tax rate, which will see Canada lose a competitive edge as the U.S. plans to lower the federal corporate tax rate from 35 per cent to 20 per cent. That would essentially close a huge gap between the two countries.

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“Any … advantage we might have had will be erased,” Brett House, Scotiabank’s deputy chief economist, recently told Global News about the tax plan.

“We’d be pretty much on par.”

The American plan will also allow companies to write off investments into new machinery and equipment.

“It’s much more attractive for companies to invest in machinery and equipment,” Hejaz explained.  “That’s going to make American companies much more productive.”

This could force companies who weren’t looking to invest in upgrades to do so.

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“Companies that would not otherwise re-invest in equipment and machinery and revamping their operations for whatever reason, now all of the sudden there is a huge tax incentive to do exactly that,” he explained.

Although the situation may seem bleak, there may be some positive effects for Canada.

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“Some of it is good news, some not so good news,” Douglas Porter, chief economist at BMO, recently told the Canadian Press.

On the one hand, he anticipates a boost in short-term spending and growth and an increase in the U.S. dollar, all of which could boost Canadian exports. On the other hand, he said Canada could lose its long-term advantage on corporate taxes, compounded by uncertainty on the trade front.

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Hejaz warns that the increased exports may be tempered by however the NAFTA talks play out and if Trump makes some sort of America First moves regarding the tax breaks.

He maintains that Canada needs to react quickly because once a company announces its intention to move, there is very little one can do to pull the brakes.

To illustrate his point, Hejaz explained how he opens each school year by asking his students why corporate tax rates in Canada are so much lower than personal.

“Many of them think that it’s because corporations are powerful and individuals aren’t, but the real reason is that capital is mobile and people are not.”

*With files from Erica Alini and the Canadian Press

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