Interest deductibility vital: Conference Board

Nearly everyone in the financial world remembers Jim Flaherty’s 2006 Halloween announcement that income trusts were to be taxed, but that wasn’t the only plan the federal finance minister has had that’s caused outrage in the business community.

In March 2007, Flaherty discussed eliminating interest deductibility on foreign investments, which was one part of a plan to restructure Canada’s international taxation policy. The notion of removing the option for businesses to deduct interest on non-Canadian investments caused such a stir that the government convened a panel led by former Scotiabank CEO Peter Godsoe last November, in-part to address this.

While the panel will release its findings in December, one economist is already speaking out about the dangers of changing the deductibility rules. Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, says it doesn’t make sense to penalize companies for investing abroad, especially in today’s global market.

“There’s a fairly sophisticated argument that business today is built around global value,” he says. “You don’t make anything in one country any more. All the pieces are integrated.”

Hodgson sent his thoughts to the panel before its comment period closed on July 15, though he just revealed his thoughts publicly on Monday. He says the Conference Board is usually quiet on matters such as this, but it cannot remain in the shadows anymore. “We have not been players historically, but it’s about time we got in game,” he says.

In the economist’s response to Flaherty’s plans, he points out that more and more Canadian firms are investing outside of the country to become globally competitive. “We should ensure Canadian firms have a level playing field,” Hodgson explains.

If the government stopped allowing businesses to deduct their interest payments, offshore investing would become more expensive and, as a result, it would discourage companies from strengthening their operations in other countries. “We’re already losing market share to a whole bunch of countries,” says Hodgson. “Outward investment is a critical tool today to allow firms to enter other markets, reach consumers and create business revenues.”

While Hodgson admits that the cost of funding won’t skyrocket, he argues that some Canadian companies primarilly operate outside of the country, so it’s unfair to punish them.

He cites Bombardier as an example. “Without offshore investments, the company couldn’t maintain a head office in Montreal and grow their Canadian business. It’s about acquiring assets and building assets; that’s just the way the world works right now.”

Catherine Swift, president and CEO of the Canadian Federation of Independent Business, agrees that removing the interest deductibility option would be a bad move. Like Hodgson, she can’t understand why the government would propose this. “It’s an unusual move given our rapidly globalizing environment,” she says. “There’s just so much investment money flowing across borders in all directions.”

If the legislation passes, it shouldn’t affect most small business directly, says Swift, but it could have an indirect impact. “Smaller firms are in supply chains to larger firms,” she explains. “If large firms are affected it will trickle down the network. If the whole economy is strained, everyone will suffer.”

Both Swift and Hodgson are happy that the panel was created, as it shows the government might be having second thoughts, but until they make their final decision, it’s likely the government will continue sending mixed messages on whether Canada should or shouldn’t invest outside of our borders.

“In the last three or four years I’ve heard Canadian ministers talk about how outward investment is good thing,” says Hodgson. “More than anything, this is a question of whether all of Canada’s polices are aligned in creating more globally competitive companies.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com