Firms seek federal help with Trump’s tariffs
Costly steel and aluminum levies still hang over Canada’s head
On a dreary November day, Ben Whitney made the trek from London to Ottawa with a message for lawmakers and Finance Minister Bill Morneau.
While it’s great the government nailed a new North American free trade deal, companies like his are struggling to compete, and are getting hammered by the 25-per-cent steel and 10-per-cent aluminum tariffs that still hang over Canada’s head in spite of the USMCA agreement-in-principle.
Morneau will update the country later this month on just what impact those tariffs and all the trade uncertainty are having on the economy in the Nov. 21 fiscal and economic update. In advance of that, business operators, union leaders and others are flagging their wish lists.
In the case of Whitney, who runs Armo Tool and Abuma Manufacturing in London, Ont., it’s pretty simple.
He employs 225 people who design and build the machines that make oth- er things — car parts like brake lines and fuel lines for big global automaking companies, as well as machines that are used in the food services, environmental technology and defence sectors.
If that sounds like traditional manufacturing, think again. “We’re building the automation,” he said of his companies, which are riding the next curve in the workplace.
And every week, Whitney says, he is courted by “very aggressive” American
economic development officials — “state of Ohio, state of Nebraska, state of South Carolina, district of this or that” — trying to lure him to expand or move to the U.S.
They call or email with a hard sell: “‘We’ll give you free property taxes forever if you buy land and open up.’ ‘We’ll start a program in the local college specifically to train people to come and work in your business,’ ” Whitney said.
But while Whitney says his family, and his family’s 50-yearold business, are rooted here, he needs help from the federal government now.
Whitney sells about half of his finished products into Canada, a quarter into Mexico and a quarter into the U.S., competing against other Canadian, American and offshore companies.
As soon as there was talk of tariffs, well before the U.S. levied surcharges on Canadian metals in May and Canada’s countermeasures took effect in July, suppliers jacked up prices. “Everything has gone up 25 per cent,” he said.
One of Whitney’s suppliers revealed a price list that showed items that sold last November for $950 rose to $1,300 in March — a 36-per-cent hike. Canada’s retaliatory tariffs didn’t take effect until July.
Whitney says he can’t pass on costs on his highly engineered value-added products, especially where customer quotes may have been given a year earlier. Right now, he says, price hikes resulting from tariffs are enough to “wipe out the profit on most projects.”
The system — and the paperwork — Ottawa set up to offer financial aid to affected industries doesn’t help Whitney. He buys Canadian and U.S. metals from Canadian distributors. He’s not the importer in the first instance, and distributors are loath to give out the required details of their wholesale prices, product suppliers and markups. So Whitney has joined Ken Neumann of the United Steelworkers of Canada, and a parade of other business leaders, operators, manufacturers and municipal leaders in the past month to insist Prime Minister Justin Trudeau get the cross-border tariffs lifted as soon as possible.
Meanwhile, many are looking for immediate tax help.
Whitney isn’t asking Morneau to match U.S. corporate tax cuts, but he does want Ottawa to match the American boost for capital spending.
U.S President Donald Trump cut the corporate tax rate in January from 35 per cent to 21 per cent — essentially erasing any tax advantage Canada had with a combined federal-provincial corporate rate of about 28 per cent — and also allowed companies to immediately deduct the full cost of any capital spending on equipment.
“It would mean that when I buy equipment, I’d pay less taxes in the short term,” said Whitney. “That would mean that I could afford to buy more equipment or I can afford to grow, because growing costs money — to buy inventory and hire employees.”
Accelerated capital cost allowances are a policy tool that ministers of finance have often used. It permits the depreciation of a capital asset faster than its useful life. Going back to 1964, governments have used faster tax writeoffs to encourage more investment. The Liberal government extended a “clean energy and conservation” measure, which the Parliamentary Budget Office estimates will cost $195 million over four years.
The Harper government provided and repeatedly extended accelerated capital cost allowances for machinery and equipment used by manufacturing or processing corporations.
Leading voices for big and small businesses often don’t agree on exactly what the government should do in budgets or economic updates, and that’s the case as Morneau readies his Nov. 21 economic update.
Some big business groups are urging the finance minister to match the American tax cuts, while small and medium-sized businesses represented by the Canadian Federation of Independent Business say that should not be the top priority.
Yet those representing business owners are speaking with one voice on Whitney’s key demand: that the federal government respond to Trump and allow businesses to write off the full depreciation of capital spending in one year instead of spreading it over several years.
Morneau has signalled he is not keen on matching broad U.S. corporate tax cuts. He and his officials have talked about targeted measures to address “competitiveness,” but remain coy on the details.
Dennis Darby, president of the Canadian Manufacturers and Exporters, says in addition to speedier writeoffs for plant equipment, the definition needs to be expanded to the systems and technology to run it. Those definitions have been expanded in Europe and the U.S.
“We are not as competitive as the U.S. in terms of our tax treatment of investment. That’s different than changing the overall tax rate. We think that’s the number one priority that needs to happen and it will help unleash some of the capital that’s sitting there,” he said in an interview.
In a recent report, the Parliamentary Budget Officer said the corporate tax changes in the U.S. would mean that some multinational corporations would shift some profits out of Canada, resulting in a $500million drop in corporate taxes for federal coffers each year. But the report concluded that overall the American tax moves would not make Canada less attractive for business investment.
“While Canada’s corporate tax advantage relative to the United States has declined, it is important to recall that firms’ investment decisions are based on more than taxes alone,” the report said.
David Macdonald, an economist with the Canadian Centre for Policy Alternatives, warns business groups often inflate how much will be reinvested as the result of their tax wish lists.
He said corporate tax cuts in the U.S. have contributed to “massive deficits” and to deficits in Canada as well, while not sparking big reinvestments in machinery or employees. He doesn’t object as much to accelerated capital cost allowances —“the one upside of that is that … you actually have to make an investment to get a tax break” — but he figures the vast majority of companies would have made those kinds of purchases anyway. Macdonald hopes the tax measures for business are “limited to an accelerated capital cost allowance. What would frankly be more interesting would be a general increase to the corporate tax to offset the tax loss for that.”
In reality, he says, large multinational corporations have found other ways around the statutory corporate rates, including transferring “a lot of their profits out to the Bahamas and they pay zero per cent on that ... This is going to matter more for small- and mediumsized companies in Canada that don’t have access to the same tax dodges as the big international corporations.”
Darby acknowledges “there’s a fiscal effect” to the key targeted measure that businesses are now seeking, “because you write off that equipment earlier, which means it lowers your taxes in the year of investment.
“However we are convinced that by increasing our capacity, obviously it increases output and output increases taxes, so over time … that obviously increases the tax revenue the government collects.”
Canadian Federation of Independent Business president Dan Kelly said the American counterpart to his organization found a big uptick in investment as a result of Trump’s tax reforms for capital spending. The CFIB has urged Morneau to allow businesses to claim up to $100,000 a year spent on new equipment or technology, in the year of purchase.
For Whitney, it’s short-term but it’s key. “I could afford to grow, or I could afford to buy more equipment to be more productive and more competitive internationally.”