You’ve got to be kidding
27 March 2007
It looks like the biggest piece of proposed legislation in Finance Minister’s Jim Flaherty budget from last week has received almost no attention from the media to date. The so-called International Tax Fairness Initiative proposes legislation that will restrict the ability of Canadian acquiring companies to deduct the financing costs of such investments/acquisitions from their net income.
Deducting financing costs from taxable income is a tax benefit companies’ enjoy throughout the G8. With this proposed legislation, the Federal Government is telling Canadian companies who are trying to grow their business abroad by financing their acquisitions in Canada 3 things:
1. Your domestic cost of financing will now effectively be doubled (ie. you can’t deduct your financing costs to reduce your taxes, thereby effectively doubling your cost of capital).
2. Go to a non-domestic provider of capital to finance your acquisitions (ie. sending good business abroad).
3. You are no longer competitive enough to be an acquirer and therefore prepare yourself to be sold if acquisitions are part of your business strategy.
How does this make sense? How does this create jobs in Canada? How is this in the public good? How does this support the growth of world-class Canadian companies? Talk about the hollowing out of corporate Canada ………………………
In talking to some senior tax folks who are in the “know” about these proposed changes, they used words and terms like “shocking”, “crazy”, “the most significant changes Tax Act since 1972”, and “the government doesn’t understand the implication of these proposed changes”.
So why hasn’t this proposed legislation been rallied against by the media? My only explanation is that this must be seen as a “Bay Street” issue and not a “Main Street” one.
However, it is not too difficult to see that this proposed legislation should be a concern to all Canadians. We need to have this legislation stopped in its tracks before it hurts our best home-grown companies and we lose all the benefits of having them living in our communities.
FMU
3 Responses to “You’ve got to be kidding”
March 27th, 2007 at 4:09 pm
Hopefully the Canadian Press will increasingly look to your blog as a source of top-notch finance information and properly lend enough attention to these changes. With all the private equity money available we certainly didn’t need a reason not to acquire foreign companies. At least Canadian companies are being encouraged to make capital expenditures to remain competitive.
March 27th, 2007 at 9:46 pm
If Open Text acquires Centrinity (Richmond Hill, Ontario-based), they can deduct the interest on the acquisition debt.
If Open Text acquires Ixos in Germany, they can’t deduct the interest charged on debt raised to fund the acquisiton.
But if a Canadian company sells a product through a Hungarian subsidy (arranged by their Canadian-based accounting firm), the tax rate on those sales is substantially lower to the parent co. than if those sales were booked through the Montreal, Halifax or Calgary office.
It all makes perfect sense to me.
MRM
March 28th, 2007 at 10:30 am
Can they still deduct floatation costs? Sounds like we are chopping off the leg to save the foot… and setting up a bit of a bizzare way of “taxing” our foreign subsidiaries. Also seems quite contrarian to many of the other federal initiatives to encourage Canadian Direct Investment Abroad.