The slow Bleeding of CorporAte CAnAdA

The chief executive of a large Canadian company said he was at a Vancouver board of trade dinner this week. “The level of foreign investment has never been so low and continues to fall off a cliff. There is a real, genuine, honest, non-partisan concern that Canada is so completely out of touch with the real world,” he said.

The CEO said his contemporaries in corporate Canada speculated that a number of companies, including Enbridge, the country’s fourth biggest company by market capitalization, are set to decamp.

“The rumour is they’ve been planning to move for a while and the U.S. tax changes sealed the deal,” said the disillusioned CEO.

Not so, says the company. “Enbridge does not have any plans to move its corporate headquarters to Houston,” said Suzanne Wilton, a senior communications adviser at the company.

The Calgary-based pipeline company bought Houston-based Spectra Energy in a $28 billion deal in 2016, igniting speculation that the company might move lock, stock and oil barrels.

Fair enough. But are any discussions taking place about relocating any functions or personnel among the 3,900 people working in Calgary to Houston, I asked?

“There is no contemplation of significant moves of functions or groups from our Calgary headquarters,” said Wilton.

What does “significant” mean, I wondered. “Can you please tell me how many jobs are going to be reassigned to the U.S. and in what areas?” I asked. “Enbridge has no plans to move our corporate headquarters from Calgary to Houston. There is no contemplation of significant moves of functions or groups to Houston from our Calgary headquarters,” said Wilton.

Such an unconvincing denial suggests an unspecified number of jobs are indeed moving south — something that might soon become a familiar refrain. It is the problem of Canada’s lack of competitiveness — rather than the re-negotiation of NAFTA or the failure to build a pipeline to tidewater — that may be the gravest danger to the future health of the Canadian economy. Jobs, capital and head office functions are not gushing south of the border, but a gradual seep is becoming evident.

“It’s the slow bleeding of Canada,” said Jack Mintz, the president’s fellow of the School of Public Policy at the University of Calgary.

Another oilpatch giant, Encana, said last month its chief executive Doug Suttles is relocating from Calgary to Denver, but denied there are plans to move the headquarters south, where half of the company’s capital is deployed. There have been suggestions TransCanada might also be considering a move to Houston — speculation that was denied by the company.

The siren call of lower taxes and a less stringent regulatory regime in the U.S. is not confined to the oilpatch. Mintz said he talked recently to a major mining company that is taking a close look at the U.S. tax reforms with a view to relocating.

“It’s one of the biggest changes in the past two decades,” he said.

In the past, companies would attempt to keep profits out of the U.S., moving functions like sales and marketing to Canada, in order to escape a federal corporate tax rate of 35 per cent.

But the Trump administration’s move has lowered the federal rate to 21 per cent — a shift that is even more attractive in a state like Texas where there is no state corporate tax.

Businesses don’t need to move their brass plate to the U.S. to benefit from the lower rate — they simply shift more of their operating functions.

“We are at the beginning of a major reset in how Canadian cross-border tax planning will be done,” said law firm Oslers in a note to clients.

The reforms make the decision to incorporate in Canada more difficult and reverse the tax advantage Canada has enjoyed in terms of the marginal effective tax rate on investment — the most comprehensive indicator of the tax burden on new investment. (The combined U.S. federal-state corporate income-tax rate will fall from 39.1 per cent to 26 per cent, slightly lower than the Canadian federal-provincial corporate average of 26.7 per cent. But there are other advantages in President Donald Trump’s package, such as being able to write off machinery and equipment investment costs from profits, rather than depreciating them).

Dave McKay, RBC’s president and CEO, said this month that investment capital is leaving Canada “in real time” — a flight that will be followed by a loss of talent.

“We would certainly encourage the federal government to look at these issues because, in real time, we’re seeing capital flowing out of the country,” he told The Canadian Press.

“We see our government going around the world saying what a great place Canada is to invest. Yes, it is a great country, it’s an inclusive country, it’s a diverse country, it’s got great people assets. But if we don’t keep the capital here, we can’t keep the people here.”

Statistics Canada revealed this week the stock of foreign direct investment in Canada remained relatively healthy in 2017 — increasing 1.9 per cent to $824 billion. But that was the slowest pace since 2011, it masks a 12.2 per cent decrease in the oil and gas sector and, crucially, accounts for a period before Trump’s tax cuts took effect.

Mintz advocates dropping the Canadian corporate rate two percentage points to 25 per cent to protect the government’s tax base, while others like TD deputy chief economist Derek Burleton have urged the government to initiate broad-based tax reform — eliminating outdated tax credits and scrapping archaic regulations.

In the run-up to his most recent budget, Finance Minister Bill Morneau said he was more focused on addressing long-term challenges like fixing the gender gap than “knee-jerk reactions” to the U.S. tax cuts.

He said he is confident in the resiliency of the Canadian economy; that growth, employment and consumer confidence are all at satisfactory levels, while measures taken to address personal debt levels have had some success in cooling an overheated housing market. Corporate tax rates would remain competitive and the government is keeping a “close eye” on the U.S. changes, he said.

But he was dismissive of the primacy of tax rates as a determinant on investment.

“Has the lower Canadian tax rate (federal rates have fallen from 28 per cent in 2000 to 15 per cent today) generated a significant difference in terms of business investment in Canada versus what would otherwise have been the case? I don’t think there is clear evidence to support that,” Morneau told Bloomberg last month.

It’s true — tax issues are not the only thing that drive investment decisions. But Canada stacks up less and less well when judged by other metrics, given uncertainty over NAFTA, minimum-wage hikes, high electricity prices, jurisdictional wrangling over pipelines and carbon taxes, the imposition of new environmental regulations and the widely-held impression that this is a government more interested in taxing than generating wealth.

The confluence of all these things means the blood-letting is set to continue until Ottawa wakes up to the fact that we’re now living in a totally different investment world.