Proposed Border-adjusted Tax (BAT) could thump Canada’s exporters


Published in the Financial Post


When it comes to trade, President-elect Donald Trump does not seem all that concerned about Canada. That doesn’t mean Canadian exporters should not be concerned about him.


While we will likely escape the targeted tariffs he plans against countries like Mexico and China, a revolutionary Republican tax proposal could damage Canada more than any other nation on earth.


It is called the Border Adjusted Tax (or BAT). It would mean American companies could no longer write-off the cost of imported goods. Only the costs of American-produced goods would be deductible. To simplify, a gift store in Maine buys a bottle of Quebec maple syrup for $1 and sells it for $3. Under the status quo, the store can write off the dollar spent buying the Canadian product, so it would pay business tax only on the remaining $2 in profit. Under the BAT, the company could not write-off goods from abroad, so it would pay corporate tax on all $3, even though it only made a profit of $2.


If the retailer bought the maple syrup from an American sugar bush, on the other hand, it could deduct the cost. For the cabane à sucre in Quebec to compete, it would need to sell its syrup at a big enough discount to compensate for the tax advantage its American competitors would enjoy. All other things equal, that discount would be around 15%, because that is the business tax rate Trump says he will establish.


Unfortunately, we are not just talking about maple syrup. Canada exported almost CDN$400 billion in goods to the U.S. in 2015, which works out to almost a fifth of our gross domestic product. A 15% tax on a fifth of our economy could do serious damage.


The BAT has the backing of two Congressmen with the power to do something about it: House of Representatives Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady.


President-elect Trump has not stated a definitive position on it, but it lines up perfectly with his plan to cut imports and boost domestic production. With Republican domination in the House, Senate, and Oval Office, there is a real chance it will happen.


If so, American automakers would continue to deduct the cost of wages paid to a worker in Detroit, but not those paid to the worker in Windsor. By firing the Ontarian and hiring the Michiganian, the auto company would save on taxes. Moving west, a barrel of Alberta oil would need to be discounted 15% vis-à-vis a barrel from North Dakota for it to be attractive to American refineries — a terrifying fact given that 99% of Canadian oil exports go to the U.S.


But it gets worse. The BAT would eliminate all U.S. corporate taxes on export income, so earnings from sales into Canada would be tax free for American companies. Meanwhile, Canadian companies selling goods at home will continue to pay roughly 26% in corporate tax, giving American businesses an advantage in our home market.


Economists predict that reduced imports and increased exports would result in a rising American dollar, which would neutralize the effect of the BAT policy. That is the theory anyway. Even if it comes true, it would take time, while Canadian exporters lose business and workers lose jobs.


Our problems do not stop there. The Republican tax plan would also allow American businesses to write-off a capital investment in the year it was made, rather than gradually over the life of an asset, as is required of most industries in Canada. Imagine an American company and a Canadian company each buy identical tractors on the same day. The American business writes it off immediately and can reinvest the tax savings the same year, while the Canadian competitor waits for savings to dribble back over decades. Who has the upper hand?


Then there is Trump’s plan to cut corporate tax from 35% to 15%, which is 10% lower than the federal-provincial corporate tax rate in Canada. Finally, American businesses will not have to pay the new Liberal carbon tax and payroll taxes, nor the exorbitant electricity costs the Ontario Liberal government has imposed in Canada’s largest province.


Even without Trump, Canadian exports are already in trouble. Between October 2015 and October 2016 Canada lost 19,600 natural resources jobs and 25,400 manufacturing jobs, despite a low dollar.


We now risk falling even further behind America with its pro-business President and free enterprise Congress. Bottom line: we have gotten used to competing with an over-leveraged, over-taxed and over-regulated American economy. Now, American capitalism may be returning with a vengeance. It will be hungry and fierce, so we cannot afford to be fat and lazy — or they will eat us for lunch.