The Trump tax proposals and their potential impact on Canadian businesses

Donald Trump was elected to a second term as president of the United States following a campaign in which he proposed many potential changes that could affect Canadian tax policies.

Given that Republicans have won a majority in both the Senate and House of Representatives and have greater ability to carry out their agenda, Canadian businesses now have a clearer understanding of how these policy changes may shape Canadian tax policy.

Republicans will be able to pursue tax legislation early next year through a fast-track process known as budget reconciliation.

Notable tax measures centre on encouraging the domestic production of goods. Other proposed measures discussed in our prior article include exempting tip income from income and social security taxes, removing the cap on deductibility of state and local taxes, extending the 2017 Tax Cuts and Jobs Act (TCJA) beyond next year and repealing tax credits for clean energy from the Inflation Reduction Act.

While there is substantial debate on the effectiveness and viability of these measures, Canadian businesses should prepare for the chance that these proposals will become law.

Tariffs

Trump has indicated he favours tariffs on foreign goods, particularly goods coming from China. How tariffs are applied could have profound implications for U.S. importers specifically and the economy in general.

As a corollary, the president-elect has indicated an intention to renegotiate the United States-Mexico-Canada Agreement.

Countries often respond to tariffs by imposing retaliatory trade measures like tariffs of their own. Though it is unclear what actions Canada would take, a recent situation between Canada and China provides an example of how trade disputes can play out.

In October, Canada introduced a surtax on imports of steel and aluminum products from China, as well as Chinese-made electric vehicles.

China’s response to the surtax was to announce an investigation into whether sales of Canadian canola in China, of which China is the world’s second-biggest importer, could qualify as dumping. The dumping could contradict Canada’s international trade obligations and may justify a Chinese response.

In imposing the surtax, Canada had a notice period and public consultations to minimize the impact on Canadian businesses. Canadian businesses engaging in sales or purchasing primarily with the United States may want to consider lessening reliance on the United States by strengthening their supply chains with alternative sources of inputs or expanding their customer base.

If the U.S. increases tariffs, Canada could also expect to see higher inflation risks because of the future increased cost of international trade.

With an increased risk of rising inflation, Canada might respond by amending various tax policies to aid in the affordability of housing and the accessibility of business loans.

These may include forging global trade partnerships with more favourable tariff policies or adjusting corporate tax rates to remain competitive, encourage domestic investment and retain Canadian-based corporations. 

Lower corporate tax rate

To encourage domestic manufacturing, Trump has proposed lowering the corporate tax rate from 21 per cent to 15 per cent for corporations that make their products in the United States.

This rate matches Canada’s effective federal corporate tax rate for income that does not qualify for the small business deduction.

While this rate drop might encourage manufacturers to move production to the United States, other considerations—such as labour and a potential increase in the price of inputs from higher tariffs—may outweigh the decreased tax rate.

Notably, some of Trump’s Republican colleagues have questioned whether they may need to raise the corporate tax rate, instead, to pay for extending provisions of the Tax Cuts and Jobs Act.

Eliminating the federal income tax

Trump has suggested that higher tariffs could replace the federal income tax, though it’s unclear if there would be sufficient tariff revenue to make up the difference completely.

Lower personal taxes may incentivize skilled labour to move to the United States. Though Canadian employers can continue to work with U.S.-based employees, there are increased compliance concerns and, depending on the nature of the employees’ work, the risk of becoming subject to U.S. taxation.

The takeaway

The impact of the new Trump administration’s policies on Canada may be significant. As the end of the calendar year approaches, it is a good time to consider where the Canadian economy is headed, both in light of the new U.S. presidency and the current Canadian tax landscape.