Expert Conclusion:-
Flee Canada? Companies considering a U.S. move quickly learn it’s costly and complicated – and can even backfire
For many companies, redomiciling in the U.S. simply isn’t worth it, according to financial and legal advisers on both sides of the border. U.S. and Canada
Only two months into United States President Donald Trump’s second term, whispers that Canadian companies will keep fleeing to the U.S. are rampant, and there are fears that it will cause economic ruin.
Corporate giants such as Brookfield Asset Management Ltd. and Shopify Inc. have already either moved their headquarters to New York or opened an executive office there, while remaining incorporated in Canada. Lawyers and tax specialists also say they are fielding calls from companies of all sizes who want to at least consider the idea.
The reality: For many companies, redomiciling in the U.S. simply isn’t worth it, according to financial and legal advisers on both sides of the border. Once chief executives dig into the details, they quickly learn the benefits often aren’t all that compelling, and the process of relocating can be both gruelling and expensive.
To start, any perceived U.S. tax benefits usually aren’t that great – and can even be punitive. Canadian companies must also pay a departure tax worth roughly 25 per cent of their net assets on their way out.
As for Mr. Trump’s promise that U.S.-based companies won’t face tariffs, it’s misguided. The White House has repeatedly ignored the prospect of retaliatory tariffs, and a newly-American company that keeps selling to Canadian clients could end up facing stiff levies from their former home country.
There’s also the risk of political backlash, something Quebec-based trucking giant TFI International Inc. faced hours after announcing it would move to the U.S. The anger was so acute that chief executive officer Alain Bédard backtracked within four days and chose to stay put.
Of course, there can be benefits to redomiciling. For publicly listed companies, it offers the chance to get included in a U.S. stock market index, such as the S&P 500. That can attract more investor and analyst attention, helping to boost a company’s share price.
But nothing’s guaranteed. There’s already fierce competition among American companies to get into these indices, and there is also speculation that the rules for inclusion will change in the near future. S&P Global, which manages a number of major indices, might soon allow Canadian and other foreign-based companies to be included in a U.S. index despite being domiciled outside of the U.S.
“If this is the path followed, then there is no need for Canadian companies to even muse about switching to U.S. incorporation as these companies will get the benefit of U.S. index inclusion without the costly and difficult process of reincorporating south of the border,” wrote Peter Haynes, a managing director at TD Securities who specializes in index rules.
On the tax front, CEOs often assume their companies will pay lower rates in the U.S., especially with Mr. Trump bragging about the tax cuts he put in place during his first term. Yet in a number of U.S. states, the corporate tax rate is quite similar to what a Canadian company currently pays once all levels of government are factored in.
There are also scores of less obvious tax differences between the two countries. For miners, certain exploration tax credits offered in Canada may not exist in the U.S., and for health care or technology companies, the same can be true for research and development tax credits.
While there certainly are instances where a Canadian company will pay lower taxes in the U.S., the corporations that benefit have to consider their geographic mix. For the most part, revenue gets taxed in the country where it is earned. So if a newly-American company still generates half of its sales in Canada, half of its business will be taxed at Canadian rates.
“People can redomicile to their heart’s content,” said Lachlan Wolfers, the national leader of KPMG Law in Canada, but corporate taxes are mostly paid wherever a company has a permanent establishment, such as an office, factory or mine. (There are some exceptions, such as technology companies that claim they sell into Canada from the U.S., which is why Canada enforced its digital sales tax.)
Tax is a “relevant and important factor,” Mr. Wolfers said, but ultimately, “these decisions should not be tax-driven.”
Redomiciling can also be a logistical nightmare – and an expensive one.
Few business owners factor Canada’s departure tax into their calculations, and it can be sizable. In a recent case, Carol Sadler, a partner specializing in cross-border taxation at Achen Henderson in Calgary, said the departure tax would wipe out all of her clients’ cash and receivables, and then they’d have to move their equipment to the U.S. and would likely need financing to restart operations there.
The departure tax “is one of the typical deal breakers we see,” said Kris Rossignoli, a cross-border tax and financial planner with Cardinal Point Wealth in New York, who works with Canadian clients.
And even when it’s manageable, in order to physically move to the U.S long term, business owners need an immigration visa: “That’s not something you can just get overnight,” Mr. Rossignoli said.
For some, the benefits can still outweigh the costs, such as when a Canadian company has significant manufacturing and sales in the U.S. But such clients also have to look a few years out.
“I think the number of people who will do this in the short-term is really small because we just don’t know how long the tariffs are gonna last,” said Max Reed, a cross-border tax lawyer and principal of Polaris Tax Counsel in Vancouver. (U.S. Treasury Secretary Scott Bessent recently said the reciprocal tariff rate that the U.S. plans to charge each of its trading partners will be announced on April 2.)
The same is true for publicly listed corporations who might redomicile for index purposes. In early March, S&P proposed changes to its rules for inclusion in the S&P/TSX Composite Index, permitting U.S. domiciled companies “with significant ties to Canada” to remain listed here.
Responding to questions from The Globe, S&P did not say much about its reasoning and also did not discuss the likelihood of future changes to other indices.
But Mr. Haynes, the TD analyst, thinks the same thing could happen in the U.S. over the next two years. Country-specific indices, he wrote, “are a bit of a relic.”
Often, he added, “these domestic indices bear limited resemblance to a local economy – think about Shell or BP which are part of the FTSE 100 but have only a small percentage of revenue generated in the United Kingdom.”
In order to get a better insight, we got Canuck🍁AI to do some investigation:-
In light of the ferocious tariffs war, Does it make sense for Canadian companies to flee and re-domicile in the U.S.?
The decision for Canadian companies to re-domicile in the U.S. in light of the tariffs war is complex and depends on several factors. Here are some key considerations:
1. Market Access and Tariffs
- U.S. Market Access: If a significant portion of a Canadian company’s revenue comes from the U.S., re-domiciling could help avoid tariffs and reduce costs associated with cross-border trade.
- Supply Chain Considerations: Companies with integrated supply chains that span both countries might face disruptions or increased costs if they relocate.
2. Regulatory Environment
- Corporate Taxes: The U.S. has a different corporate tax structure compared to Canada. The 2017 Tax Cuts and Jobs Act lowered the U.S. corporate tax rate, which might be attractive.
- Regulatory Compliance: U.S. regulations might be more or less stringent depending on the industry. Companies need to weigh the costs of compliance in the U.S. versus Canada.
3. Operational Costs
- Labor Costs: Labor costs can vary significantly between the two countries. The U.S. might offer lower wages in some sectors but higher healthcare and benefits costs.
- Infrastructure and Logistics: Proximity to suppliers, customers, and transportation networks can impact operational efficiency.
4. Legal and Financial Implications
- Re-domiciling Costs: The process of re-domiciling can be expensive and time-consuming, involving legal, accounting, and administrative expenses.
- Shareholder Approval: Companies may need shareholder approval to re-domicile, which can be a hurdle if shareholders are not in favor.
5. Strategic Considerations
- Long-term Strategy: Companies need to consider their long-term strategic goals. Re-domiciling might offer short-term benefits but could complicate long-term plans.
- Brand and Reputation: The perception of “fleeing” Canada might affect a company’s brand and reputation, both domestically and internationally.
6. Political and Economic Stability
- Political Climate: The political climate in both countries can impact business operations. Companies need to consider the stability and predictability of the political environment.
- Economic Conditions: Broader economic conditions, including currency exchange rates, interest rates, and economic growth prospects, should be factored into the decision.
7. Industry-Specific Factors
- Industry Regulations: Certain industries might face specific regulatory challenges or benefits in either country.
- Competitive Landscape: The competitive environment in the U.S. versus Canada can influence the decision. For example, being closer to competitors or key markets might offer strategic advantages.
Conclusion
Re-domiciling to the U.S. could make sense for some Canadian companies, particularly those heavily reliant on the U.S. market and facing significant tariff barriers. However, it is not a one-size-fits-all solution. Each company must conduct a thorough analysis of the costs, benefits, and strategic implications before making such a significant decision. Consulting with legal, financial, and industry experts is crucial to navigate the complexities involved.
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