Firms expect long-term gains despite big hits over U.S. tax cuts

U.S. President Donald Trump’s corporate tax cut has some Canadian companies who do business south of the border preparing for short-term pain ahead of longer-term gains.

On Monday, Toronto-Dominion Bank became the latest firm to report it would book a one-time hit due to the Tax Cuts and Jobs Act, estimating the amount at approximately US$400 million.

While the act — which was passed by Congress in December and, among other things, dropped the U.S. corporate tax rate to 21 per cent from 35 per cent effective this year — is expected to boost earnings over the long term, it has led a number of companies to announce writedowns in part because the reduced rate changes the value of deferred tax assets already held on firms’ balance sheets.

“These are assets or expenses that work to reduce your taxable income,” said Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management. “And when you have a lower tax rate, those tax credits, if I can call them that, are worth much less.”

TD said the reduction would be booked in the quarter ending Jan. 31, but forecast that the tax cuts would ultimately help the bank’s bottom line.

“The reduction of the U.S. corporate tax rate enacted by the Tax Act will cause The Toronto-Dominion Bank … to adjust its U.S. deferred tax assets and liabilities to the lower base rate of 21 per cent, and to adjust the carrying balances of certain tax credit-related and other investments,” TD said in a release. “While the Tax Act will require a one-time charge to earnings in the first quarter of fiscal 2018, the lower corporate rate is expected to have a positive effect on TD’s future earnings.”

All Canadian companies with businesses in the U.S. will be affected by the new tax legislation, although the financial services sector seems particularly influenced by the changes.

“Banks are probably … the one industry that will be most impacted by these changes just because of the size of their U.S. footprint,” said Jonathan Farrar, associate professor and tax expert at Ryerson University’s Ted Rogers School of Management.

Other big banks are expected to make similar moves as TD.