‘Slow-motion train wreck’: Businesses slam dearth of policies in budget to address U.S. threat
OTTAWA — Canadian firms are sounding off against Ottawa’s failure to introduce policies in its latest budget to narrow the “competitiveness gap” with the U.S., saying Canada is increasingly at risk of losing investment dollars to its southern neighbour.
“There is nothing happening to make Canada more competitive — nothing that we’ve seen in this budget,” said Kevin Neveu, president and CEO of Calgary-based Precision Drilling Corp.
Many observers did not expect Morneau to heed those calls, but had suggested Canada should make some efforts to address the erosion of Canada’s competitiveness in light of sweeping tax changes brought in by U.S. President Donald Trump, who has slashed corporate tax rates from 35 per cent down to 21 per cent and considerably accelerated the pace at which companies can write off capital expenses.
Precision is the largest drilling company in Canada and has operations in the U.S., Mexico and the United Arab Emirates. Neveu said Wednesday the company will not increase capital spending in Canada this year, and will instead boost investments elsewhere.
“Either you’re helping make Canada more competitive or you’re ambivalent to negative. In our opinion, ambivalent or negative is not helpful,” Neveu said, adding that both federal and state-level policies in the U.S. have been more encouraging for new investment.
In a speech to the Economic Club of Canada in Ottawa Wednesday, Morneau countered that Ottawa will focus on more immediate worries like NAFTA and lower U.S. corporate taxes and at the same time takes steps to address longer-term domestic risks, such as the aging workforce.
Canadian businesses have been particularly concerned about changes under Trump’s tax regime that allow companies to immediately expense purchases on big capital costs such as equipment and machinery. In the past, those expenses would have to be written off over long periods of times stretching up to decades, similar to Canada’s tax policy. Ottawa’s 2018 budget did include extensions for capital cost allowances to some clean energy purchases.
The Canadian Manufacturers & Exporters (CME) association said Wednesday that Canada has been at risk of losing investment dollars to the U.S. in recent years, and that Trump’s tax cuts now underscore that threat.
The changes could recalibrate how Canadian manufacturers think about new investments, said Winston Woo, chair of the CME Ontario Finance Committee.
“You would be looking at the U.S. very, very differently,” he said.
He cautioned, however, that the Trump tax changes only recently took effect, and most companies are still waiting and watching the market.
New foreign direct investment in greenfield manufacturing developments in Canada has shrunk by 40 per cent over the last 10 years, according to the CME.
Meanwhile, U.S. manufacturers are ramping up investment. Last month, the U.S. Commerce Department said spending on business equipment leaped 11.4 per cent in the fourth quarter of 2017, the largest increase in three years. U.S. spending on machinery and equipment tends to outpace that of Canadian firms by a ratio of eight to one, according to the CME.
Toth Industries Inc., an Ohio-based manufacturer of parts for heavy machinery and trucks, is among the companies boosting spending in light of Trump’s tax cuts. Chief executive Rick Toth called the accelerated capital costs allowances a “shot in the arm” for manufacturers that can sway business owners toward re-investing in their companies.
“It definitely makes it easier to make the decision,” Toth told the Financial Post.
His firm plans to spend as much as US$800,000 in 2018 to upgrade its facility with three new computer numeric controlled (CNC) machines, an increase from US$350,000 he spent on equipment in 2017. Toth said his company needed to invest in the new equipment regardless, but said the tax reforms created relief on the investment.
“It may have only been half that without the new tax laws.”
In contrast, the growth-focused policy changes in Ottawa’s budget were “disappointingly thin,” according to John Manley, the president and CEO of the Business Council of Canada.
The Business Council had called on Morneau to immediately reduce federal corporate tax rates, as well as accelerate the pace at which companies can write off certain capital expenses.
Manley said the budget “ignores Canada’s serious tax competitiveness challenges, sending an unfortunate signal to entrepreneurs and companies that are looking to invest and grow.”
The Mining Association of Canada also spurned the absence of any policies to address corporate tax changes in the U.S., saying in a statement the budget “does little to enhance Canada’s competitiveness at a time when the country’s relative share of exploration spending and new mine investment has been declining, and as our major trading partner, the United States, has significantly reduced corporate and personal income taxes.”
Calgary-based Enerplus Corp., a light oil producer, has been funneling a larger portion of its capital into the U.S. amid rising taxes in Canada and a persistent failure to build new export pipelines into the U.S. and Canadian coastal waters.
“We’re watching this slow-motion train wreck as we’re dithering on policy,” said Ian Dundas, the president and CEO of Enerplus Corp, which produces oil in both Canada and the U.S.
Dundas said his company’s budget is 20 per cent larger in 2018 than 2017, and all excess spending will be ploughed into its U.S. asset base.
“Over the last series of years, under multiple administrations in both Canada and the U.S., a pattern has emerged: American policy has increasingly been more and more supportive of our industry,” Dundas said, adding that in Canada has “pushed ourselves in a less competitive direction.”
“If Canadian governments continue to ignore competitiveness, discourage investment, and reduce regulatory certainty, other jurisdictions with more attractive policies will encourage talent and investment to shift away from Canada,” the Calgary Chamber of Commerce said in a statement Tuesday.
With files from The Canadian Press
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