MONTREAL — Economists say recently enacted U.S. tax reforms will hurt Canada's competitiveness and give companies another reason to set up shop in or even relocate south of the border.
Ian de Verteuil of CIBC World Markets says the drop in the U.S. corporate tax rate to 21 per cent from 35 per cent makes Canada a less attractive destination to locate a head office.
In a report, he says people shouldn't expect any more inversions that have been used by Restaurant Brands International Inc. to buy Tim Hortons and Valeant Pharmaceuticals International, Inc. to acquire Biovail Corporation.
Inversions happen when a foreign company merges with a U.S. or domestic firm, resulting in a new parent company being based in another country with lower tax rates.
The U.S. was the only G7 country that taxed companies regardless where they were located in the world. That encouraged many to set up in Ireland or Canada where they would get a credit for taxes paid at a lower rate than in the U.S.
Changes approved before Christmas adopt a "territorial approach" that applies a tax of 15.5 per cent, similar to Ireland's rate.
TD deputy chief economist Derek Burleton says the tax reform bill has considerably eroded Canada's favourable corporate taxation position.
He expects the result will be a longer-term "bleed" in capital from Canada rather than a sudden exodus of investment.
It could also increase pressure on Canadian governments to take action in upcoming budgets.
Burleton says a "tit-for-tat" tax cut isn't necessary since taxes are only one factor in competitiveness. Instead, he says Canada should focus on tax reform over cuts. That includes eliminating inefficient tax credits and outdated regulations.
Companies in this story: (TSX:VRX, TSX:QSR, TSX:TD, TSX:CM)
The Canadian Press