Canada

Despite widespread reports that significant tax changes were coming in the 2017 Canadian federal budget, the document tabled in the House of Commons on March 22 contained few of the reforms anticipated by observers and signaled by the federal Liberal government.

Though Prime Minister Trudeau had indicated he would seek "tax fairness for the middle class," the government ultimately left the existing tax structure intact, and committed only to further study of the Canadian corporate and business tax regime.1

Why the retreat? Observers speculate that Prime Minister Trudeau is holding off on any significant changes until the current U.S. federal budget cycle is complete.

Trudeau Holds Off on Threatened Tax Hikes

If the first budget out of the Trump administration significantly reduces corporate taxes as promised, the tax discrepancy between the two countries will grow larger. This potential outcome has prompted concern that high net worth and high income Canadians — particularly those in mobile professions (such as medicine) and owner-managers of incorporated businesses — could be induced to relocate to the U.S. in a revival of the Canada-U.S. "brain drain."

There are also worries that President Trump could implement a tax on imports using a border adjustment tax, which could be devastating for thousands of Canadian businesses, especially if it's combined with higher corporate taxes. Already, the Trump administration has imposed new tarriffs on imports of Canadian softwood lumber.2

Budget Renews Focus on the U.S.–Canada Trade Relationship

The Canadian budget document details a “significant trade deficit in non-energy goods and services"3 with the U.S.

Trade reform has already created some uncertainty, and trade deficits are one area where President Trump has expressed considerable concern.

The state of trade between Canada and the U.S. is very different from trade between the U.S. and Mexico. The U.S. posted an $11.9 billion trade surplus with Canada in 2015, compared to a $49.2 billion deficit with Mexico in 2015.4

However, the fact that the Canadian federal budget devoted so much attention to the U.S.-Canada trade relationship demonstrates the extent to which the Canadian government may be concerned about and influenced by President Trump's thinking on the matter.

Will 2017 Be a “Double-Budget" Year?

In the wake of the restrained March budget, people are now wondering whether 2017 might be a “double budget" year for Canada. This occurred in 2011, with federal budgets in March and June (albeit with a federal election in between). If a second federal budget is tabled in this calendar year, budget watchers suggest it might be released in October or November, after the end of the U.S. fiscal year.

  • 1

    Government of Canada, “Economic and Fiscal Overview: Progress for the Middle Class," Budget 2017.

  • 2

    CBC News, “Wilbur Ross says Canada is 'dumping lumber,' as Ottawa vows to push back," April 25, 2017.

  • 3

    Government of Canada, “Economic and Fiscal Overview: Progress for the Middle Class," Budget 2017.

  • 4

    Office of the United States Trade Representative, “U.S.-Canada Trade Facts;" “U.S.-Mexico Trade Facts," Accessed: May 2, 2017.

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