Moving to Canada for Lower Taxes

In a recent op-ed, I noted that Canada's industrial heartland of Ontario is cutting its federal-provincial corporate tax rate to 25%, or 15 percentage points lower than the average U.S. federal-state rate of 40%.

Marginal tax rates affect economic behavior. Thus I was not surprised when I read in a Mark Steyn column that retailer Tim Hortons (essentially Canada's Starbucks) is packing up its U.S. headquarters and moving to Ontario. The company operates 3,457 retail outlets on both sides of the border.

Here is the company's June 29 press release:

"Management and the Board believe that the proposed reorganization would be in the best interests of the Company and our stockholders by creating operational and administrative efficiencies over the long-term, enhancing the Company's ability to expand in Canada and internationally, and improving the Company's position to take advantage of lower Canadian tax rates."

Note that the middle reason--"ability to expand...internationally"--probably implies tax factors as well. If the company wants to open locations in, say, Europe, it would be better that the parent company is located in Canada because of its more favorable tax treatment of corporate foreign investment than the United States.

With respect to jobs, Horton's reorganization probably won't affect where relatively low-wage jobs in retail branches will be located. But it might affect where higher-wage corporate headquarters jobs are located in the long run. 

As a U.S.-incorporated company in recent years, Hortons has had a high effective tax rate, averaging 32 percent. The company will shave that rate by moving to Canada by a few percentage points at first, and then by increasing amounts as lower Canadian rates are phased-in.

For more on such corporate "expatriations" get your copy of Global Tax Revolution.