Moody: Trump’s win should make Canada more tax competitive

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Like many Canadians, I was glued to the non-stop coverage of the election results in the United States last week, with my tax brain going into overdrive thinking about how Canada would respond to a high-tax-loving Kamala Harris win versus a low-tax-high-tariff Donald Trump win, which ultimately came to pass.

Despite doomsday predictions about what Trump 2.0 will mean for Canada, the short story is that we’ve seen part of this screenplay before. During his first tenure, there was a massive package of U.S. tax cuts and reform rolled out in 2017, including significant corporate tax reform, personal tax cuts and estate tax changes.

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Many Canadians, including me, were rightly concerned that Canada’s economy would struggle mightily and lose ground from a competitive perspective. Good leadership requires proactively surveying the landscape and making bold, thoughtful decisions based upon conclusions drawn from such analysis. It also requires responding thoughtfully to competitors and/or threats.

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Accordingly, many were waiting for our federal government to provide good leadership and to respond quickly and thoughtfully to ensure our competitive landscape would not be dangerously eroded when Trump’s tax reforms were announced and implemented in 2017. Instead, then finance minister Bill Morneau continuously repeated that Canada would not respond in a “knee-jerk” reaction.

Eleven months later, the Department of Finance responded in a non-knee-jerk fashion. It was a pathetic response to major tax competition.

“Eleven months since the U.S. released and effectuated historical tax reform (and 11 months of listening to the Canadian Department of Finance’s standard speaking point stating that they will not respond to U.S. tax reform in a knee-jerk fashion), the Government of Canada today provided a non-response. We believe it’s fair to say, mission accomplished; the government didn’t react at all and certainly there was no actual knee-jerk,” I said at the time.

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“The non-response ‘accomplishes’ three things: it provides a full deduction for new purchases of manufacturing and processing equipment and certain new ‘green’ technology equipment; it increases the first-year deduction for other new depreciable property purchases; and it provides no corporate or personal tax rate reductions.”

Those measures did not materially move the needle. Six years later, Canada has continued to not respond. Instead, we have had a bevy of tax increases (including the ridiculous capital gains inclusion rate increase) and politically motivated interventionist tax changes. Our country’s productivity continues to decline to dangerously low levels and we are not at all tax competitive with the U.S.

Trump 2.0 has already provided strong signals as to what he will do regarding tax policy. For example, he has publicly said he is committed to extending some of the 2017 tax changes that were scheduled to expire at the end of next year and make them permanent. He has also promised significant corporate tax cuts on domestic manufacturing, among other promises.

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“Whether wise or not, many of these changes would encourage economic growth,” economist Jack Mintz said last week. “A lower corporate income tax rate, deregulation and energy renewal will be magnets for investment from Canada.”

With many successful Canadians and businesses already leaving Canada, that magnet pull needs to be counteracted.

Good leadership, therefore, would take a proactive approach. Instead of simply responding to measures that are sure to come (or even copying such measures), Canada should get ahead of them and implement pro-growth measures. What could some of those measures be?

Well, tax reform is a must. Reform should include measures that can quickly assist in unlocking growth.

Corporate tax changes need to be part of the overall tax reform. Mintz calls this a “big bang corporate tax reform.”

Personal tax cuts across the board are also a must. Most provinces have a combined personal tax rate exceeding 50 per cent at the high end. Accordingly, we are not competitive with the U.S. and that gap needs to shrink. Frankly, using Mintz’s phraseology, we need “big bang” personal tax reform as well.

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A simpler tax system and statute are also a must.

And to help pay for the necessary tax cuts and reform, deep and significant government expenditure reductions needs to be done.

Given the federal government has shown an indifference to providing good tax leadership, it is highly possible that we’ll see a repeat of it “not responding in a knee-jerk fashion.” If so, then a lot of the doomsday predictions may come to fruition and our country’s productivity will continue to suffer and decline.

Unfortunately, our federal government does not have it in them to change course and provide good tax leadership. Instead, it will require a government change that only an election can provide.

The Conservative Party announced earlier this year that it would implement a Tax Reform Task Force within 60 days of getting elected to implement lower taxes on work and production, simplify tax rules, cut corporate welfare and reduce the share of taxes paid by the poor and so-called middle class. This is exactly what our country needs to respond to Trump 2.0.

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With the federal election scheduled to happen in October 2025 (unless we are somehow fortunate enough to get an earlier call to the polls), our current government still has lots of time to “not respond in a knee-jerk fashion.” One can only hope that such a non-response will also not include continued domestic policies that are damaging and simply political.

Canadians can ill-afford to have our tax competitiveness decline further.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. 

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