Briefing highlights
- U.S. firms could move billions from Canada
- Canadian dollar holding steady
- Bombardier narrows third-quarter loss
- Manulife profit surges almost 80 per cent
U.S. firms could move billions
American companies operating in Canada could end up moving tens of billions in earnings to the United States under a proposed Trump tax holiday.
That could, in turn, weaken the Canadian dollar, though only marginally, according to the Nomura economics group.
Like his now-defeated rival Hillary Clinton, Mr. Trump wants to bring home income from U.S. subsidiaries that isn’t taxed because it’s reinvested in the countries in which those businesses operate.
In something similar to George W. Bush’s Homeland Investment Act, Mr. Trump has proposed a one-time tax rate of 10 per cent on repatriated income.
This possibility, said Nomura’s Charles St-Arnaud and David Wagner, has caught the eye of foreign exchange investors because of the potential for currency swings as money is converted and moved to the United States.
Expect to see such tax reform now that Mr. Trump will be president, with his Republican Party in control of the House and the Senate.
Such income is now subject to a 35-per-cent tax rate, but only if brought home. And, said Mr. St-Arnaud and Mr. Wagner, “this particularity of the U.S. tax codes means that U.S. corporations have an incentive to leave all foreign profits abroad.”
The Nomura economists estimate that American companies have put away about $2.9-trillion (U.S.) in reinvested income since 2005, about $200-billion of that in Canada.
Given the amount brought home under Mr. Bush, American subsidiaries across the globe could repatriate between $435-billion and $520-billion this time around, they said.
“However, the actual size of the repatriation would depend on how favourable the tax break given to U.S. firms is,” they said in a report.
Mr. St-Arnaud said later that he estimates between $30-billion and $38-billion could be repatriated from Canada.
“The question is how much time will the U.S. firms have to bring the money back. But a fair guess would be that it would be done over a year.”
American corporations operating around the world wouldn’t bring it all back, Mr. St-Arnaud and his colleague believe.
“As was the case in 2005, we doubt that all of the retained earnings abroad would be,” they said.
“This is because only a portion of them are held offshore to avoid taxation – most are used to finance investment abroad in machinery, equipment and plants. We estimate that between 15 per cent and 18 per cent of retained earnings were brought back to the U.S. when HIA was put in place in 2005.”
There’s a lot that’s not known, however. And it could make a difference.
“It is not clear whether U.S firms would keep their retained earnings in local currencies or whether they would convert part of it back into [U.S. dollars] to avoid the currency risk,” the Nomura economists said.
“We have examined the financial reports of some of the U.S. firms most likely to have large amounts of retained foreign earnings, but none provide any details as to how they manage their retained earnings abroad.”
Mr. St-Arnaud and Mr. Wagner believe money planned for reinvestment is in the currency of the host country, but “the situation is less clear for that part that is held abroad for tax purposes,” they said.
“We think that part of it is likely converted back into [U.S. dollars] to avoid any balance sheet volatility. If it were the case, the repatriation of foreign earnings may have only a small impact on [foreign exchange] since it’s mainly the portion left abroad for tax reasons that would be brought back.”
Loonie sinks
Here’s a note for all those Trump refugees who’d like to come north and live in Canada: The loonie - the nickname for our dollar coin - is tumbling again.
So you’d still get a hefty discount if you want to buy a home in, say, Vancouver or Toronto.
The currency, which slipped amid Mr. Trump’s victory and then perked up, has so far traded at a low of 74.03 cents (U.S.) and a high of 74.7 cents. It stook at just over 74.3 cents heading by midday.
The loonie had taken an initial hit largely because of fears related to Mr. Trump’s trade rhetoric and his pledge to renegotiate or kill the North America free trade deal.
But everything’s back to normal now, which means the drivers of the currency at this point are the outlook for interest rates in the U.S. and Canada, and oil prices.
Well, not exactly normal. Observers believe the loonie could well decline again, possibly to the 73-cent mark, particularly if the Federal Reserve hikes its key rate in December while the Bank of Canada holds steady for a long time yet.
“The hawkish divergence between the Fed and the BoC remains a major driver in the [Canadian dollar vs. the U.S. currency,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group.
“And even if the Fed remained on hold, the BoC would be forced to ease due to rising concerns vis-à-vis the North American trade dynamics,” she added.
“In addition, oil prices remain depressed on global glut concerns, and there is little conviction on OPEC’s ability to seal a deal next week, given that Saudi Arabia is somewhat asked to ‘sacrifice itself’ for the sake of the other members.”
Bombardier loss narrows
Bombardier Inc. narrowed its loss in the third quarter compared with a year earlier but saw revenue in the quarter dip, The Globe and Mail’s Bertrand Marotte reports.
The Montreal-based plane and train maker posted a net loss of $94-million (U.S.) or 4 cents a share, compared with a loss of $4.88-billion or $2.20 a year earlier.
The previous year’s third-quarter loss was due primarily to booking about $4.4-billion in non-cash charges on its C Series new-jet program as well as its Learjet 85 platform.
Revenue in the third quarter fell to $3.74-billion from $4.1-billion.
Bombardier is just one of several Canadian companies reporting results.