Thursday , October 21 2021

Aggressive responses, significant costs: Business like Liberal measures, but longs for U.S. style tax deductions.


Much-anticipated bid by Finance Minister Bill Morneau to increase competitiveness Canada will distance itself from combating aggressive US tax reform and inject new life into the sluggish business landscape, business leaders and economists say.

In drawing up the economic statement of his fall, Morneau is expected to fight two major reforms in the US: measures that allow full and immediate elimination of investments in machinery and equipment, and deep cuts in corporate tax rates – enough to wipe out long-term Canadian profits supported.

The minister discussed at least one of these problems, matching US abolition and extending it to 2024, two years longer than would be available south of the border.

"The focus here is trying to increase Canada's competitiveness and that is a positive step in the right direction," said Doug Porter, chief economist at BMO Capital Markets. "But the costs are significant. I might not use all of my chips in one size. I might also have reduced corporate income tax by percentage points. But we will see how it works. "

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

"We want to be close to our customers and our customers determine where to manage their business based on the entire cost package," he said. "So, if they can remove investments that make things here more attractive to them."

But write off is only one consideration in attracting companies to establish operations in Canada, he added.

The focus here is to try to increase Canada's competitiveness and that is a positive step in the right direction. But the cost is significant

Doug Porter, chief economist, BMO Capital Markets

"If it's about Canada's competitiveness, there are also many things that go into that," Wildeboer said. "The first is the corporate tax rate, the other is the carbon tax."

Overall, the abolition of the new federal tax will reduce government revenues by $ 14 billion and deepen the annual deficit.

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

"In general, I think that would be a good thing," said Alfred Sorensen, president and CEO of Pieridae. "This will help put us at the level of the playing field with LNG terminals in the United States."

Another measure that has attracted Sorensen's attention is the government's willingness to provide a 100 percent per cent reduction in clean energy equipment, because Pieridae has considered installing equipment at a proposed LNG facility that recycles waste heat into electricity.

"That might have a significant impact on our decision to install such equipment," Sorensen said.

In addition to write-offs for producers, the new Accelerated Investment Incentive will allow all companies in all sectors to double the current reductions in "real" assets, such as buildings, and "intangible" assets such as intellectual property.

"It takes longer than expected, but these steps should help overcome the challenges of competitiveness by incentivizing further investment," Brian DePratto, senior economist at TD Bank Group, wrote in a note to clients.

As part of the goal of increasing exports by 50 percent by 2025, the government will also dedicate $ 1.1 billion for measures aimed at opening new markets for Canadian companies. Most of the money will be used to improve sea ports and other transportation capacity.

These steps should help overcome the challenges of competitiveness by incentivizing further investment

Brian DePratto, senior economist, TD Bank Group

Another $ 800 million will go to the "Strategic Innovation Fund", supporting "innovative investments" across the country – a measure that has been on the wish list for Canadian manufacturers and exporters Dennis Darby.

"This fund helps companies grow and we know the problem we face in Canada is getting businesses from small to medium size," Darby said. "Overall this is a good budget. We do not get a commitment to overall tax reduction, but we will continue to encourage it. "

Under measures that came into force in January, US President Donald Trump cut US federal and subnational joint corporate tax rates to 26 percent from 39 percent, compared to the combined provincial and federal rates in Canada at 26.7 percent.

The measurements, combined with the complete and immediate removal of equipment and machinery, have triggered a huge wave of investment south of the border, said Robert Hattin, chief executive of ProVantage Automation in Ancaster, Ontario.

"This is an industrial economy like I haven't seen in 20 years," said Hattin, whose company sells factory automation products to customers in Canada, the United States and Mexico. "And the elimination of capital expenditure is a big motivator for people. All multinational companies that work with us have transferred most of their capital to the US. "

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

Glenn Mullan, president of the Prospectors and Developer Association's Association, said tax credit was a "big win" for miners, and a sign that the government recognized the importance of the mining sector. The new rule means that exploration companies can extend tax credit from one year to at least five years, which should spur more mineral exploration, Mullan said.

Passing in 2000, METC was designed to encourage investment in mineral exploration by enabling companies to provide tax credit 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," Mullan said. "It's very good for the most junior companies because they can do more financial and strategic planning than before."

"The one-year horizon is problematic from the start," he added. "Mineral exploration is a long process, not too many people find mines in the first summer they work."

For Demetrius Tsafaridis, whose Burlington CareGo company sells robotics and automation equipment, US reforms are driving big changes in its customer base. While 2017 sales are divided equally on both sides of the border, this year, 90 percent of them are in the US.

"There is no doubt there is a big increase in business for us in the US because of changes in taxes," he said. "But this step from our government today is a very aggressive response. Companies that are here and aggressively want to grow will jump over all this. This gave them immediate recovery and it made it easier for companies like me to sell to them.

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

"Their long term must do something about tax rates because companies will not invest here in the US if our taxes are higher."

With files from Gabriel Friedman and Geoffrey Morgan

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