While news from across the North American region paints a grim picture of Canada without NAFTA, there is something more sinister coming -- the potential overhaul of the United States tax code.
According to a study by PwC Canada, the impending tax reform in the US, which was approved by lawmakers late last year, would strip Canada of its competitive advantage, putting at risk US$85bn in annual economic activity or 4.9% of Canada's gross domestic product.
Some of the industries that would be badly hit include chemicals, machinery manufacturing, plastic and rubber manufacturing, and transportation manufacturing. Mining and food manufacturing are also likely to be affected by the move, albeit only to a lesser degree.
"All else being equal, these sectors as a whole would likely face a significant shift in investments from Canada to the US over the next 10 years," the study noted, adding that the provinces of Ontario, Alberta and Quebec would lose the most due to their relatively high concentrations of capital-intensive businesses.
Further, PwC believes that the US tax reform puts the following at risk:
- 635,000 jobs, or 3.4% of Canadian employment
- $47bn in labour income
- $20bn in government revenue from personal and corporate taxes and other payments.
"Putting these figures in perspective, the Conference Board of Canada predicts a 0.5% decline in Canada’s GDP, and the loss of about 85,000 jobs, if the North American Free Trade Agreement is terminated," PwC said.
Meanwhile, the report also analysed the potential impact of the tax reform to Canada's ability to attract and retain talent. It found out that the tax reform would further exacerbate the income gap, which was already substantial given the higher US wages and lower personal tax rates.
However, there remains hope. PwC recommends the following policy options to counteract the negative effects of US tax reform, including:
- gradually reducing the combined federal/provincial statutory corporate tax rate to 20% from the current average of close to 27%;
- introducing a temporary 100% depreciation allowance for business spending on equipment, structures and “acquired intangibles” such as patents, trademarks and copyrights;
- increasing Canada’s federal personal income tax brackets to more closely align with US personal tax brackets;
- enhancing Canada’s system of tax credits for business spending on research and development;
- introducing a special tax incentive (known as a “patent box”) for innovative companies that locate their research and development operations in Canada.