Written by Claire M.C. Kennedy

The election of Donald Trump combined with Republican control of Congress means that U.S. tax reform has suddenly gone from totally impossible to highly likely. The specifics of that reform are not known but the President-elect has promised personal and corporate tax cuts, in the corporate case specifically aimed at keeping jobs in America and stimulating investment. The corporate tax rate reductions will reduce the motivation for so-called inversion transactions like the one that saw Tim Hortons merge with Burger King as a means of avoiding high rate U.S. taxation on foreign profits of U.S. multinationals.

There is also speculation that the U.S. will offer a temporary tax holiday to encourage repatriation by American multinationals of foreign earnings held outside the country. This may be a precursor to a larger U.S. tax reform initiative to bring the U.S. system in line with most other developed countries' corporate taxation systems that offer an exemption from domestic taxation for foreign active business earnings of multinational enterprises.

The U.S. reforms pose both a risk and an opportunity for Canadian businesses. The U.S. tax cuts will come at time when combined federal and provincial corporate and personal tax rates are increasing in Canada. That could hurt our competitiveness for talent (potentially prompting another brain drain) as well as making it harder for Canadian jurisdictions to compete for foreign direct investment. On the plus side, a U.S. tax holiday on repatriated overseas earnings could stimulate significant domestic investment by large American corporations, which could in turn boost Canadian exports south of the border and with it Canadian economic growth.

On his website, President-elect Trump says the vision of his tax plan includes:

• Reduce taxes across-the-board, especially for working and middle-income Americans who will receive a massive tax reduction.
• Ensure the rich will pay their fair share, but no one will pay so much that it destroys jobs or undermines our ability to compete.
• Eliminate special interest loopholes, make our business tax rate more competitive to keep jobs in America, create new opportunities and revitalize our economy.