A proposal that would allow U.S. companies to immediately write off capital investments, part of a sweeping tax-reform plan announced by the White House last week, could put Canadian companies at a further disadvantage to their southern counterparts, tax experts say.
White House officials laid out their plans to overhaul the U.S. tax system in a nine-page document Sept. 27.
The document includes a proposal to significantly accelerate capital cost allowances for corporations, allowing U.S. firms to immediately deduct capital expenses for items such as computers, heavy machinery and other non-structure investments.
The immediate write-offs would effectively create an up-front tax break on asset purchases, freeing up cash flows for U.S. companies compared to Canadian firms that deduct capital investments over many years.
The document called the modification an “unprecedented level of expensing with respect to the duration and scope of eligible assets,” and tax experts say the change — if successfully passed — would mark one of the biggest structural shifts in U.S. tax policy in decades.
“This is maybe even more powerful than the corporate income tax changes,” said Daria Crisan, a researcher at the University of Calgary’s School of Public Policy.
The deductions for capital investments, summarized in a single paragraph inside the document, have been overshadowed by the move to slash federal corporate tax rates from 35 per cent to 20 per cent. The proposal also caps the tax on small businesses at 25 per cent, down from closer to 40 per cent today, according to experts.
Today, corporations in Canada and the U.S. typically write-off capital expenses for depreciating assets over years-long periods, often stretching more than a decade. The U.S. proposal would effectively eliminate that pay-out period entirely.
“It essentially front-loads the incentive for investment,” said Kevin Milligan, an economics professor at the University of British Columbia.
The proposal is expected to receive pushback from U.S. Congress, however, and does not include details over how the White House would recoup lost revenues from the cuts.
Republican House speaker Paul Ryan, who is a major backer of the reforms, had earlier proposed a border-adjustment tax to cover the cost of a major tax break, but the idea has since been scrapped.
Milligan said the proposal around accelerated capital cost allowances could also receive opposition because it appears to come alongside the elimination of deductions for interest payments, a move that could pit capital-intensive industries against leaner sectors.
“This will be industry versus industry,” he said.
Oil and gas
Capital-intensive corporations, such as those in oil and gas or utilities, may be less open to the changes than major retail chains, he says, because their interest costs could expand significantly.
“A company with a lot of debt on the books is going to make out very poorly.”
The U.S. proposal comes amid concerns in the Canadian business community that a more stringent regulatory environment and higher taxes will make this country less competitive.
In a recent survey of Canadian business executives by the Ottawa-based Business Council of Canada, 64 per cent of respondents said the business environment in Canada had worsened over the past five years. Many cited higher taxes and increased regulation as the reason for the decline.
The survey found 20 per cent of respondents believed the business environment has improved, while 16 per cent said it had neither worsened nor improved.
“We are concerned that going to a 20 per cent (corporate tax rate) in the U.S. will create an incentive to invest in the United States,” said Brian Kingston, the vice-president of policy, international and fiscal issues at the Business Council.
Researchers at the School of Public Policy estimate that average corporate tax rates in the U.S. would fall below those in Canada if the White House proposal were to pass in its current form.
Corporate tax rates
The organization published a report recently that found the changes would bring average corporate tax rates in the U.S., both federally and at the state level, down to 26 per cent from 38 per cent today. Canada’s average corporate tax rate, including both federal and provincial taxes, is 27 per cent, the report said.
Several provinces have recently hiked up their corporate tax rates, including in Alberta, from 10 to 12 per cent, and British Columbia, from 10 to 11 per cent. Saskatchewan plans to scale back its corporate tax rater from 12 per cent to nine per cent by the summer of 2019. Of the 43 U.S. states that impose a state-level corporate tax, only four are higher than nine per cent.
Oil-producing provinces like Alberta and Saskatchewan would be particularly at-risk if either the corporate tax or capital cost expensing changes go through.
Most oil-dependent provinces have remained competitive due to a low federal corporate tax rate, an agreeable royalty regime and the absence of a retail sales tax on capital equipment, the report says. But those regimes are now “under threat” if capital cost expenses are accelerated or if corporate tax rates are trimmed back.