The loonie came up for air last week. After sinking to a 13-year low of less than 69 cents (U.S.) in mid-January, the Canadian dollar ended the month on an upswing as the U.S. central bank delayed increasing interest rates in that country and the Bank of Canada held off lowering them here.
As breathers go, however, it risks being short-lived. Currency traders are almost unanimously bearish on the loonie as commodities prices languish and the Canada-U.S. interest rate differential widens. One prominent forecaster sees the loonie sinking to 59 cents by year-end.
For many corporate leaders, hospital and university presidents and technology start-ups, the reality of a 70-cent dollar means only one thing: a renewed brain drain. Recruiting and retaining top talent was a lot easier when the currency hit parity with the U.S. greenback a few years ago. It now takes $1.40 Canadian to match every $1 (U.S.) that whiz kid can earn by going south.
"You thought getting talent to either stay in Canada or [trying] to attract folks in the U.S. was hard? Good luck. It just got 40 per cent more expensive," John Ruffolo, the head of OMERS Ventures, the venture capital unit of the Ontario municipal workers pension fund, told a tech conference last week.
Couple that with Ottawa's move to raise taxes on incomes above $200,000, pushing the top marginal tax rate to more than 53 per cent in Ontario and Quebec, and with the the Liberal election promise to tax stock-option gains as regular income, and it's pretty much an open invitation for top talent to look south. For all Prime Minister Justin Trudeau's branding of Canada as an "engine of invention" during his recent trip to Davos, his policies will make it harder to invent anything in Canada, except an excuse to leave.
Top earners know that higher deficits combined with an activist government agenda portend even higher taxes down the road. (See Ontario, Quebec.) Meanwhile, the Trudeau plan to tax stock-option gains above $100,000 at the same rate as regular income, instead of the lower capital gains rate, will deprive tech start-ups of a critical tool used to retain the cream of the crop.
Consider a recent medical school grad or computer science PhD carrying a heavy student debt load denominated in Canadian dollars. Not only could they earn more in the United States, and face a much lower tax bill, their U.S. income would go much farther in repaying their Canadian-dollar debt. While Texas and Florida impose no state income tax at all, even a "high tax" U.S. jurisdiction such as California trumps Toronto, Montreal or Vancouver in this scenario.
We have seen this happen before. In the late 1990s, the brain drain became a national emergency. The low loonie made for open season on prime Canadian companies, which were scooped up at bargain prices by foreigners, taking head offices and top talent with them. The head of Nortel, the Canadian tech champion then at the height of its glory, warned in 1999: "Taxation is testing the allegiance of some of Canada's best and brightest. The people we need are being forced out."
The number of departures for the United States was not massive. And Canada continued to attract skilled immigrants from other countries. But those who left were exactly the kind of people Canada needed to hold on to. As a 2000 Statistics Canada study put it: "Canada suffers a net loss of workers in a variety of key knowledge-based occupations…The composition of emigrants is weighted to the better-educated, high-income earners and people of prime working age."
Governments did what they normally do when they face a problem. They threw money at it. Jean Chrétien, the prime minister at the time, may have dismissed the brain drain as a ruse orchestrated by corporate Canada seeking tax cuts. But his government invested heavily in university research chairs to lure top professors and scientists to Canada, inflating university salaries across the board, while his finance minister, Paul Martin, cut personal and corporate income taxes by $40-billion in his 2000 budget alone. He also eased taxation on stock options. Provincial governments, meanwhile, awarded huge salary increases to doctors to keep them at home.
How long before it all happens again?