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IMF Analyzes Impact Of US Tax Changes On Canada

by Mike Godfrey,, Washington

01 June 2017

A shift by the US toward greater protectionism and a sharp reduction in its corporate tax rate could hit Canada's competitiveness, according to a new report by the IMF.

In its latest report on the state of the Canadian economy, the IMF noted that the imposition by the US of higher tariffs or new non-tariff barriers under a revised North American Free Trade Agreement (NAFTA) "would undercut growth prospects in Canada, leading to a permanent reduction in investment and consumption." It added that if the US administration pushes ahead with its plans for a cut to the corporate tax rate, Canada may become less attractive as an investment destination.

The IMF explained: "While the global economy has improved with stronger manufacturing activity, the renegotiation of NAFTA, US policies on tax reform and climate change, and the timing and form of the UK's withdrawal from the EU could tilt policies toward protectionism and economic fragmentation. This would have significant consequences for Canada, an economy that is highly reliant on trade and cross-border flows."

On the domestic front, the IMF recommended a holistic review of the overall tax system, to assess whether there is scope for reducing distortions, minimizing administration and compliance costs, and enhancing equity. "A more simple and efficient tax system is important to encourage greater participation in the labor market, and promote investment and innovation, so that Canada's tax competitiveness will be preserved with the rest of the world," it said.

The IMF also warned that the property transfer taxes on purchases by foreign residents introduced by the British Columbian and Ontarian governments target capital flows and discriminate against overseas buyers. It said the provinces should replace these measures, with possible alternatives including "a combination of prudential and tax-based measures that discourage speculative activity without discriminating between residents and non-residents."

TAGS: compliance | tax | investment | free trade agreement (FTA) | property tax | export duty | tariffs | corporation tax | Mexico | manufacturing | tax rates | Canada | United States | import duty | tax reform | trade | North America

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