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Tim Hortons Inc. is returning to the land of hockey, where seemingly every street corner houses, well, a Tim Hortons.
Tims, the coffee and doughnuts icon, is currently incorporated in the United States, but it's returning to its Canadian roots to take advantage of falling corporate tax rates.
Co-founded in Hamilton in 1964 by hockey legend Tim Horton, the company announced yesterday that it is proposing to reorganize itself as a Canadian public company.
"Will other corporations do this? Maybe, maybe not," Brian Yarbrough, an analyst with Edward Jones in St. Louis, said in an interview.
Apart from the tax issue, there are compelling administrative reasons for Tims to restructure, given that the company derives more than 90 per cent of its revenue from its Canadian operations, Mr. Yarbrough said.
"However, the tax rate is the biggest thing they are going to see the most savings from."
After the immediate costs of the reorganization are absorbed, Tim Hortons' tax rate could initially be two or three percentage points lower than its current tax rate of 33 per cent in the U.S., he said. "And as tax rates continue to come down in Canada, obviously … that will benefit them even more."
This, in turn, will improve the bottom line and free up more money for reinvestment in the business, Mr. Yarbrough said.
Tim Hortons was acquired by U.S. hamburger chain Wendy's International Inc. in 1995 and continued as a U.S.-registered company after its spinoff in 2006.
"Management and the board believe that the proposed reorganization would be in the best interests of the company and our stockholders by creating operational and administrative efficiencies over the long term, enhancing the company's ability to expand in Canada and internationally, and improving the company's position to take advantage of lower Canadian tax rates commencing in the year following implementation," the company said in a statement.
It is too soon to say whether Tim Hortons is on the vanguard of a trend, economists and tax experts said Monday.
"The big thing is that the Canadian corporate tax rates are coming down. They are going to be 15 per cent by 2012," down from the current federal corporate income tax rate of 19 per cent, Bruce Ball, a tax partner at BDO Dunwoody LLP, said in an interview.
A number of the provincial governments are also moving to lower their corporate tax rates to 10 per cent over the same period, which will result in a combined federal-provincial rate of 25 per cent in 2012, Mr. Ball said.
This compares with an average combined federal and state tax rate of 40 per cent in the U.S., added Nials Veldhuis, senior economist with the Fraser Institute, which has long advocated lower corporate tax rates to stimulate investment.
Mr. Veldhuis said Canada is not as competitive internationally when the full sweep of taxes that apply to business are taken into account. However, Canada is "moving in the right direction."
Tims will "be able to take advantage of lower Canadian tax rates" and other companies in the U.S. might follow suit if Canada does more to cut the overall cost of doing business in Canada, Mr. Veldhuis said.
Tim Hortons said it will maintain its dual stock listing in New York and Toronto, and that its move does not affect its commitment to expanding in the U.S. market.
The company now has 2,930 restaurants in Canada, 527 in the U.S. and a presence in Ireland and Britain, primarily through self-serve outlets in grocery stores. Tim Hortons said it plans to continue its international expansion beyond the U.S., Ireland and the U.K., as well as expanding its Canadian operations.
The company reported a profit of $66.4-million or 37 cents a share in the first quarter of 2009, up 7.5 per cent from $61.8-million or 33 cents a year earlier.
Under the proposed reorganization, the company would be incorporated under the Canada Business Corporations Act and would retain the name Tim Hortons Inc.
"We expect to incur certain charges for discrete items, the majority of which would be non-cash tax charges, and various transactional costs in the year of implementation," the company said.
Prior to announcing its application for reorganization, the company had projected that its operating profit would grow by 10 per cent in 2009.