Upcoming budget season an opportunity to meet growing U.S. competitiveness threat: Burleton
CIBC Capital Markets is warning Canadian businesses can’t count on having a competitive edge now that the U.S. has passed through wide-ranging tax reform.
In a report to clients, equity strategist Ian de Verteuil wrote that while much of the focus has been on which Canadian companies could get a boost from the reforms, competitiveness will take a meaningful hit on a number of fronts, including a likely end to so-called tax inversions.
“We certainly believe that some Canadian companies with large U.S. operations will now consider moving their domicile to the U.S., were they to make large acquisitions in the U.S.,” de Verteuil wrote.
While the pace of tax inversions has slowed over the last few years, a number of high-profile examples including Tim Hortons parent-company Restaurant Brands International (QSR.TO) and drug-maker Valeant Pharmaceuticals (VRX.TO), grabbed headlines earlier in the decade by decamping to Canada to take advantage of the lower tax rate.
Changes to the treatment of capital investment could drive manufacturing south, de Verteuil warned.
“As part of U.S. tax reform, businesses will be allowed, for tax purposes, to immediately write-off the total investment in equipment… this means that in the first year, the cash outlay for the same piece of equipment in the U.S. could be 20 per cent lower than in Canada,” he wrote.
“We still believe that U.S. manufacturers will, on average, have a material tax advantage versus Canadian peers.”
The impact doesn’t end with the manufacturing sector, de Verteuil said, warning the flow of outbound merger and acquisition activity from Canada could be slowed by the new tax rules.
“Canadian M&A-driven firms have had a significant tax advantage versus their U.S. peers. A Canadian company should have been able to outbid a U.S. company simply on the basis of tax,” he wrote. “With U.S. tax reform, this advantage no longer exists – and Canadian roll-up firms should expect more competition in doing deals.”
Ultimately, de Verteuil said Canadian firms won’t necessarily be on the back foot as a result of American reforms, but barring action from lawmakers on this side of the border, will face a very different competitive landscape in years to come.
“To be clear, Canadian companies will not be disadvantaged vis-à-vis U.S. peers as a result of the U.S. tax changes. We would broadly say that they will now be on equal footing,” he wrote. “But that’s not the point - the point is that the long-term competitiveness of Canada and of Canadian companies has been eroded.”
In spite of his warnings of the wide-ranging impact to Canadian competitiveness, de Verteuil highlighted a collection of companies with outsized exposure to the U.S. that could be the big beneficiaries of the deal.
|Company||U.S. as a share of overall revenue||Tax rate|
|FirstService (FSV.TO)||94 per cent||34 per cent|
|Boyd Group Income Fund (BYD-u.TO)||94 per cent||30 per cent|
|New Flyer Industries (NFI.TO)||91 per cent||31 per cent|
|Kinaxis (KXS.TO)||85 per cent||41 per cent|
|Winpak (WPK.TO)||82 per cent||31 per cent|
|Stella-Jones (SJ.TO)||71 per cent||29 per cent|
|Badger Daylighting (BAD.TO)||66 per cent||28 per cent|
|Uni-Select (UNS.TO)||63 per cent||33 per cent|
|Stantec (STN.TO)||58 per cent||28 per cent|
|Ritchie Brothers (RBA.TO)||57 per cent||27 per cent|