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Sunday, March 25, 2012

The Hollowing Out of Canada by Guest Blogger

In capitalism, there are buyers and sellers. When one company's owners agree to sell out to another company's owners, a bigger fish is eating a smaller one.
One line of reasoning says that if it's assets were managed to their best effect, the target company's market value would be higher, and it would not be worth a buyer paying that high value to take it over. So, when a buyout occurs, it is because the assets are not being utilized as effectively as the new owners would utilize them. The line of reasoning says better management of the assets being purchased will create more profitability, and in the long run, the world will be better off as measured by current accounting standards. And seen from the point of view of the seller, why not sell to the highest bidder? Effectively, this is what goes on in the stock markets every day in the trading of shares.
But the consequences of takeovers of Canadian businesses by foreign corporations are: (1) that the head office moves to another country, and the Canadian operation no longer has control or as many management jobs, and (2) the stock listing moves to a stock exchange in another country and any dividends are paid from that country, are taxed by that country, and Canada's CRA sees the dividends as now coming from a foreign source, and taxes the dividends at a higher rate than "Canadian" dividends.
Examples are given in the Globe and Mail article, but there are many others such as the buyout of MacMillan Bloedel by Weyerhauser in which the Vancouver head office disappeared and went to Seattle. Another example is the buyout of BC Gas by Kinder Morgan in which the Vancouver head office went to Texas.
Government intervention in the past has not worked very well. Foreign Investment Review Agency (FIRA) executed moves that were seen as protectionist and erratic.
One might think that Prime Minister Harper will be ideologically reluctant to interfere with open capitalist markets. Yet, there he is trying to make friends with China.
Personally, I think we need smarter government that addresses the needs of Canada in these two respects. It is important to keep Canadian head offices in Canada, otherwise we lose control of the country and our managerial talent goes elsewhere. Secondly, Canadian investors deserve fair tax treatment for what is essentially business income generated in Canada. An agreement at the G20/OECD level may well be required. I'd be curious to know the stand of the other political parties in Canada on this issue.
I, for one, do not wish to become an eaten fish.
Submitted by guest blogger @imboggled on Twitter. Please feel free to comment below. 

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1 comment:

  1. Hey, imboggled, this is a great post! I for one was not aware of the tax implications that result when a company moves its head office out of the country. This is definitely something that people need to be aware of. Thanks for your wisdom! Prime Minister Harper is not much of an economist. He is giving Canada's power away to China with his unethical oil deal! That does not sound smart to me.