Aggressive response, significant cost: Businesses like Liberal measures, but yearn for U.S.-style tax cuts

Finance Minister Bill Morneau’s much anticipated bid to boost Canadian competitiveness will go some distance toward countering aggressive U.S. tax reforms and injecting new life into a sluggish business landscape, business leaders and economists say.

In crafting his fall economic statement, Morneau was expected to counter two headline reforms in the U.S.: measures allowing the full and immediate write off of investments in machinery and equipment, and a deep cut to the corporate tax rate — enough to wipe out Canada’s long-held advantage.

The minister addressed at least one of those concerns, matching the U.S. write offs and extending them until 2024, two years longer than they will be available south of the border.

“The focus here was trying to improve Canadian competitiveness and that’s a positive step in the right direction,” said Doug Porter, chief economist at BMO Capital Markets. “But the cost is significant. I might not have used all my chips on one measure. I might also have reduced corporate income tax by a percentage point. But we’ll see how it works.”

For Canadian manufacturers and those who sell to them, the new ability to immediately deduct the full cost of machinery and equipment is “only a good thing,” said Rob Wildeboer, executive chairman of Martinrea International Inc.

“We like to be close to our customers and our customers determine where to set up their businesses based on the entire cost package,” he said. “So if they can write off investments that just makes things here more attractive for them.”

But write offs are just one consideration in attracting companies to establish operations in Canada, he added.

The focus here was trying to improve Canadian competitiveness and that’s a positive step in the right direction. But the cost is significant

Doug Porter, chief economist, BMO Capital Markets  

“If this is about Canadian competitiveness, well there are a lot of things that go into that,” Wildeboer said. “One is the corporate tax rate, another is the carbon tax.”

In all, the new federal write offs will lower government revenues by $14 billion and deepen annual deficits.

The measures come just in time for Calgary-based Pieridae Energy Ltd., which is looking to build a $10-billion liquefied natural gas project in Nova Scotia.

“Generally speaking, I think it would be a good thing,” said Alfred Sorensen, president and CEO of Pieridae. “It would help put us on a level playing field with the LNG terminals in the United States.”

Another measure that caught Sorensen’s eye was the government’s willingness to provide a 100-per-cent deduction for clean energy equipment, as Pieridae has been considering installing equipment at its proposed LNG facility that recycles waste heat into electricity.

“That would probably have a significant impact on our decision to install that type of equipment,” Sorensen said.

In addition to the write offs for manufacturers, a new Accelerated Investment Incentive will allow all companies in all sectors to triple the current allowable deductions on both “tangible” assets, such as buildings, and “intangible” assets like intellectual property.

“It took a bit longer than might have been expected, but these measures should help address the competitiveness challenge by incentivizing further investment,” wrote Brian DePratto, senior economist at TD Bank Group, in a note to clients.

As part of a goal to increase exports by 50 per cent by 2025, the government will also dedicate $1.1 billion toward measures aimed at opening new markets for Canadian firms. Much of that money will go toward improving marine ports and other transportation capacity.

These measures should help address the competitiveness challenge by incentivizing further investment

Brian DePratto, senior economist, TD Bank Group   

Another $800 million will go into the “Strategic Innovation Fund”, supporting “innovative investments” across the country — a measure that had been on the wish list for Canadian Manufacturers and Exporters’ president Dennis Darby.

“This fund helps companies expand and we know a problem we have in Canada is getting businesses from a small to medium size,” Darby said. “Overall this is a good budget. We didn’t get a commitment to overall tax reductions but we’ll keep pushing for that.”

Under measures that took effect in January, U.S. President Donald Trump slashed the combined U.S. federal and subnational corporate tax rate to 26 per cent from 39 per cent, compared to Canada’s combined provincial and federal rate of 26.7 per cent.

That measure, combined with the full and immediate write offs on equipment and machinery, has sparked a huge wave of investment south of the border, said Robert Hattin, chief executive of ProVantage Automation in Ancaster, Ont.

“It’s an industrial economy like I haven’t seen in 20 years,” said Hattin, whose firm sells factory automation products to customers in Canada, the United States and Mexico. “And the capital expenditure write offs are a huge motivator for people. All the multinationals we work with have been redirecting the bulk of their capital to the U.S.”

There were incentives for the beleaguered mining sector as well, in the form of the extension of the Mineral Exploration Tax Credit.

Glenn Mullan, president of the Prospectors and Developer’s Association, said the tax credit is a “huge win” for miners, and a sign that the government recognizes the importance of the mining sector. The new rules mean exploration companies can extend tax credit from one year currently to at least five years, which should spur more mineral exploration, Mullan said.

Passed in 2000, the METC is designed to encourage investment in mineral exploration by allowing companies to pass tax credits to investors. According to Mullan, two-thirds of all mineral exploration in Canada is funded through METC investments.

“Now for the first time, we have a five-year time horizon,” said Mullan. “That’s very good for the most junior companies because they can do much more financial and strategic planning than ever before.”

“A one year horizon was problematic from the beginning,” he added. “Mineral exploration is a long process, not too many people discover a mine in their first summer of work.”

For Demetrius Tsafaridis, whose Burlington firm CareGo sells robotics and automation equipment, the U.S. reforms prompted a major shift in his customer base. While his 2017 sales were split equally on either side of the border, this year, 90 per cent of them are in the U.S.

“There’s no question there’s been a huge surge in business for us in the U.S. because of the tax changes,” he said. “But this move from our government today is a very aggressive response. The companies that are here and aggressively want to grow will jump all over this. This gives them an immediate recovery and it makes it much easier for companies like mine to sell to them.

But when it comes to convincing new companies to establish a footprint in Canada, the move may not be enough, he said.

“Longer term they’ll have to do something about the tax rate because companies aren’t going to invest here over the U.S. if our taxes are higher.”

With files from Gabriel Friedman and Geoffrey Morgan

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Published at Thu, 22 Nov 2018 16:47:44 +0000