On Tuesday, the U.S. electorate sent a strong signal to the U.S. political and economic establishment, as well as the rest of the world. In the coming days, experts will parse and examine the myriad ways that the outcome of this election will reshape broad swaths of U.S. domestic and foreign policy. Like everyone else, we will analyze and assess the impact of these changes. Our focus will continue to be on what these changes mean for Canadian businesses and investors and how they can move forward confidently in a legal and regulatory climate that has sharply changed direction.
One of the areas where we anticipate profound and early refocusing is tax policy. With republicans controlling the House of Representatives and the Senate, as well as the White House, the prospects for meaningful domestic and international tax reform are strong. Because of the degree of integration of the U.S. and Canadian economies, it has always been uniquely important for Canadian businesses to thoughtfully and efficiently navigate cross-border tax differences between the U.S. Internal Revenue Code and the Canadian Income Tax Act. While this has always been a complex area, many of the cross-border tax planning norms and expectations may be destabilized as Trump’s tax policy takes shape and hold. For example, some or all of the following could occur (perhaps at the same time):
- A lowering of U.S. corporate tax rates from 35% to 15% would reverse the corporate tax rate arbitrage differences that have undergirded Canadian – U.S. cross-border tax planning for many years (in the sense that the U.S., rather than Canada, would become the “low rate” jurisdiction). Such a reversal, if it occurs, can be expected to create shocks (and after-shocks) that will force a bottom-up reassessment of traditional cross-border tax planning norms. For example, if the nominal value of a tax deduction in Canada suddenly became more valuable than the same deduction in the U.S., what knock-on effects would this have for a Canadian company’s cross-border tax planning?
- Several “centerpiece” tax initiatives of the Obama administration may be reviewed and repealed/replaced. For example, the recent finalization of related-party debt rules under Section 385 could be reshaped in ways that set in motion new risks and new possibilities.
- Some believe that the realignment of power in Washington may also clear a path for remodeling the U.S. system of international taxation to a territorial system which may or may not resemble the quasi-territorial system in Canada. Such a profound alteration of the manner in which foreign income of U.S. corporations is taxed could fundamentally change the manner in which U.S. capital is invested into (and repatriated out of) Canada.
- The international consensus that the OECD’s BEPS project attempted to forge has already been fraying, with individual countries taking unilateral actions in lieu of following concerted proposals. An “America first” Trump administration could reasonably be expected to continue this trend which may, in turn, encourage more countries to follow. In such a case, instances of tax arbitrage and tax mismatches would proliferate, creating opportunities for new risks (for the poorly advised) and reward (for the well advised) in cross-border planning.
For now, there is simply not enough information available to provide meaningful guidance on how Canadian businesses and investors can or should react to these potential changes. It seems clear, however, that we are heading into a period of time, unlike any other we have seen in decades, where real and far-reaching economic change is possible (if not probable).
As these events unfold, Osler will monitor and analyze these changes from the unique perspective of Canadians so that we can partner with our clients in moving forward confidently together.