written on behalf of Feigenbaum Law

Dave McKay, the president and CEO of RBC has told the Canadian Press that the federal government must act to staunch the flow of investment capital from Canada to the U.S. His concerns come as Ottawa has already been facing pressure from business leaders to respond to the recent tax overhaul south of the border.

Capital Flow Out of the Country May Be Followed by a Brain Drain

One of the anticipated consequences of the American tax reform is the movement of business investments to the U.S.- something that McKay says is already happening “in real time”, particularly in the clean-technology and energy sectors.

McKay warns that this initial drain of investment will likely be followed by a loss of talent, and that “the next generation of engineers, problem solvers and intellectual property could be created not north of the border, but south of it instead”. McKay believes it is critical to bring human capital and financial capital together in one place.

Ongoing NAFTA Negotiations

The state of Canada’s investment landscape has been uncertain since President Trump announced a possible departure from NAFTA and as renegotiation discussions pertaining to the tri-lateral agreement continue.

McKay remains hopeful that a NAFTA deal can be reached. RBC is Canada’s largest lender and has substantial operations in the U.S (where 23% of its revenue is generated). McKay notes that RBC is “working through the uncertainty” and the bank is engaged in discussions with government officials on both sides of the border.

The Tax Cuts and Jobs Act: U.S Tax Reforms Impacting Canada

Business leaders and others have previously expressed concerns that despite uncertainty around NAFTA, the U.S tax reforms may have a deeper impact on Canada’s competitive advantage.

McKay notes several elements of the recent tax changes that will increase the flow of capital out of Canada, including an amendment that permits American companies to immediately write off the full cost of new equipment and machinery. This expensing of capital investment creates a significant incentive, allowing quicker investment returns, which may impact Canada where there is currently has a two-year write-off for equipment in only the manufacturing and processing sectors.

Douglas Porter, chief economist of BMO, echoes some of McKay’s concerns, noting that some economic data suggests that capital is already moving south. Porter states that the Canadian equity market and the Canadian dollar have both been “on the weak side” this year, which may support the possibility that money is leaving the country, although he notes that it is too early to draw firm conclusions.

The Recent Federal Budget

In the lead up to the release of the most recent federal budget, federal Finance Minister Bill Morneau was asked to take specific measures to address the competitiveness concerns raised by those in the business community. This did not come to fruition, and many continue to be concerned.

John Manley, president of the Business Council of Canada, has argued that Canada has “always” been in competition to attract and retain investment and that this has been difficult. He noted that this should be addressed since investment can “move quickly”, but the most recent budget did not address competitiveness at all.

Indeed, Morneau has since had to defend the budget against complaints that it does not do enough to protect Canada from the impact of American tax reforms. A spokesperson for Morneau recently argued that Canada’s corporate tax rates remain competitive and that Canada has been a leader in growth among the other G7 nations.

Others have noted that none of the provincial budgets that have been released so far have taken steps to address Canada’s competitiveness, which may also be compounding the issue.

We will continue to monitor the Canadian response to both NAFTA and U.S. tax reforms and will track the impact of these changes.  In the meantime, if you have questions about personal or corporate tax planning, contact Feigenbaum Law. We offer customized tax and financial planning solutions to clients in the U.S., Canada, and around the globe. Contact us online or at (416) 777-8433 or toll-free at (877) 275-4792.to learn about how we can help with complex, cross-border tax planning.