How Canadian Tech Can Tackle U.S. Tax Reform

August 2017

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As presented in our April tax alert, both the proposed Trump Plan and the House Blueprint would have a significant impact on Canadian companies and individuals doing business in the U.S. For the Canadian tech industry, the uncertainty south of the border carries much opportunity but also particular risk.

Expansion Opportunities

While reduced U.S. corporate tax rates would boost the U.S. competitive tax landscape, they could also offer opportunities for Canadian tech companies expanding to the U.S. The current top federal U.S. corporate tax rate for businesses is approximately 35% and the average combined U.S. federal and state rate is 40%; Canada’s small business tax rate is approximately 15%. If the U.S. matches the Canadian rate or even lowers it to 20%, Canadian businesses may be able to structure their tax planning to take advantage of this rate arbitrage.

When It’s Too Late to Iterate

From fintech to e-commerce, tech companies are known for the fast pace of changes to their business model and operations. Usually this agility serves them well, by driving quick responsiveness to market demands. Changes to tax legislation, however, move at their own pace, and the time it takes for changes to roll through committees and legislative bodies can prove costly in the long term. Say, for example, a biotech startup expands to Silicon Valley without the requisite tax planning. That startup may avoid tax consequences in the short term, before proposed changes come into force. (In addition, startups often generate tax losses in their early years.) However, if U.S. tax reform does indeed arrive, the company may have already created tax issues that are expensive to unwind. 

Planning Amid Confusion

Undoubtedly, the details of the proposed U.S. tax reform are still unclear. Despite the uncertainty, however, there is good reason to take note. We may not know exactly what will happen or when it will happen, but change is likely on its way.

To tackle this round of U.S. tax reform debate, begin discussions with your advisors early on and then continue to connect with them, so that when changes come you can be prepared to react. BDO will continue to monitor changes as they develop and will work with you to advance your business and tax planning based on your business needs. 

For advice on how to structure your U.S. expansion, contact our U.S. Corporate Tax Practice Leader, Dan Lundenberg, our National Technology & Life Sciences Tax Lead, Harry Chana, or our National Technology & Life Sciences Leader, Peter Matutat.

Learn more about BDO’s Technology & Life Sciences services and U.S. tax services for Canadian businesses.