It seems like Canadian firms doing business with the United States would need to prepare for some short-term damage before they can enjoy longer-term gains. And this is all due to the corporate tax implemented by the Trump administration.
Bank files one-time loss
Monday saw the Toronto-Dominion Bank reporting a one-time loss as a result of the Tax Cuts and Jobs Act. The amount is estimated to be approximately US$400 million.
Congress passed the act in the month of December and it led to a drop in the rate of American corporate tax from 35% to 21%, effective 2018. The act is predicted to enhance the earnings over a period of time and has caused numerous firms to declare write-downs. This is partly because the reduction in tax rates will alter the value of overdue tax assets that are already present on the balance sheets of these firms.
The Toronto-Dominion Bank stated in a report that the decrease in the American corporate tax would cause the bank to make adjustments in its U.S. pending tax assets to the new 21% base rate. It would also modify the transfer balances of various other investments, including ones related to the tax credit. Even though the tax regulation calls for a single time charge to revenues earned in the first fiscal quarter, the reduced corporate rate would likely prove to be beneficial for the future earnings of the bank.
Financial services endure maximum impact
According to Professor Walid Hejazi, from the Rotman School of Management, University of Toronto, these are expenses or assets that will work to minimize the taxable income. And when there is a reduced tax rate, the value of the so-called tax credits also goes down.
It is expected that nearly all Canadian firms with U.S. based businesses would be affected to some extent by this new tax law. At the same time, financial services seem to be especially influenced at the moment.
Jonathan Farrar, from Ted Rogers School of Management, Ryerson University, is of the opinion that banks are perhaps that one industry which will be highly impacted by the tax regulation, simply because they have a large footprint in the United States.
According to a recent note from RBC, the Toronto-Dominion Bank and the Bank of Montreal have the highest exposure to American taxes among all Canadian banks.