Banks likely the most impacted

Continued from FP1

“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.

While TD is the first of the Big Six to announce a write down linked to the tax cuts, others are expected to follow.

Bank of Montreal said in its management’s discussion and analysis for the year ended Oct. 31, 2017 that the cut in the U.S. federal rate from 35 per cent to 20 per cent (which, at the time of BMO’s filing in, was still just a proposal) would reduce its net deferred tax asset by approximately US$400 million. This “would result in a one-time corresponding tax charge in our net income,” the bank said.

BMO also said it expected its annual net income to rise as a result of a tax cut.

An RBC Capital Markets note from Friday noted that Bank of Montreal and TD “have the largest exposure to U.S. taxes amongst the Canadian banks.”

Now that the details of U.S. tax reform are finalized, “we expect the banks to provide better clarity on potential tax benefits and deferred tax asset writedowns,” RBC said in a separate note.

Insurer Manulife Financial Corp., which also does business in the U.S. as John Hancock, announced Dec. 22 that it would take an estimated after-tax hit of approximately $1.9-billion due to U.S. tax changes.

“Lower taxes are favourable and give rise to higher future earnings,” a Manulife spokesperson said in an email, “but it also means that we have to adjust the valuation of future tax deductions in our balance sheet, which gives rise to an upfront charge.”