BDO has previously issued a Tax Alert regarding the tax reform proposed by U.S. President Donald Trump. We've suggested that should the plan be enacted in its current state, it will have a significant impact on Canadian companies doing business in the U.S., as well as many people with ties to the U.S.
Canadian manufacturers are among the most exposed in my opinion, simply because they are over-represented in terms of their U.S. footprints (whether through their bricks and mortar facilities south of the border, their customer base, or their supply chain). Let's briefly look at each aspect of the proposed changes.
Lower Tax Rates
Proposals to reduce U.S. corporate tax rates would lessen the competitive advantage Canadian companies had with their lower corporate rates. Although as we've pointed out, Canadian corporations already paying U.S. income tax should see a reduction in the amount paid, it's safe to say that our U.S. competitors will be the overall winners.
Border Adjustment Tax
The addition of a Border Adjustment Tax on imports to the United States would make our U.S. exports more costly, placing another disadvantage on Canadian manufacturers. It's heartening to note that Trump does not propose such a tax, however, previous proposals by Republican leaders do.
Interest Deductibility
Finally, the Republican leadership have also proposed the elimination of the interest expense deduction and the immediate expensing of capital investments. Given the capital-intensive nature of manufacturing operations, this would represent another net cost to Canadian businesses using debt to finance their U.S. operations.
It's not at all clear how everything will shake out south of the border, and lack of certainty can (and should!) cause Canadian manufacturers to reconsider otherwise sound plans for U.S. expansion. If your company is considering such an expansion (and again it should!), make sure you are speaking with your advisors. They can help you make sound strategic and investment decisions, and as soon as this period of uncertainty is over, my hope is that the flexibility you built into your business plans will serve your manufacturing business well.
For advice on how to structure your U.S. expansion, contact BDO's U.S. Corporate Tax Practice Leader, Dan Lundenberg or National Manufacturing Leader, Mike Gillespie.
Learn more about BDO's manufacturing consulting services and U.S. tax services for Canadian businesses.