The longstanding relationship between Canada and the US and the integration of our economies mean that last week’s US election results, including the election of Donald J. Trump as President, will have an impact north of the border.

Whenever a new US President and Congress are elected, change is inevitable. This election is no different in that business challenges and opportunities will arise. At McCarthy Tétrault, lawyers and senior advisers are here to help our clients navigate these changes, and we wish to comment on a few of these – in a very preliminary way.

Our first US election briefing on trade and labour mobility issues may be accessed here.

Energy and Environment:

• The election of Mr. Trump could have an immediate impact on energy and environmental policy in North America. Because the US is Canada’s key market for oil, natural gas and electricity export, such impact will be felt in Canada by energy producers. Mr. Trump’s energy-friendly stance may present opportunities for Canadian energy producers. Canada will continue to represent a secure and reliable source of supply for our neighbours and may be presented with better market access under the new administration.
• In comparison to his predecessor, Mr. Trump has expressed a more favourable view of the production and use of fossil fuels and has signaled support for pipelines. In particular, he has indicated that he favours the Keystone XL pipeline that would move oil from the Alberta oil sands to US Gulf Coast refineries and has stated that he will invite TransCanada Pipelines to reapply for permits. Mr. Trump also pledged to boost the production of natural gas and coal and rescind what he called during the election campaign “job destroying” environmental rules in the energy sector.
• Mr. Trump promised to back away from his predecessor’s various commitments relating to the environment and climate change, including those in respect of the oil and gas sector. For example, on March 16, 2016, Canada and the US agreed to coordinated climate action, including committing to reduce methane emissions from the oil and gas sector by 40 to 45% from 2012 levels by 2025. If the US backs away from this and similar commitments, such as the Paris Agreement which deals with mitigating greenhouse gas emissions, Canadian energy producers may face competitive disadvantages that Canadian federal and provincial governments will need to consider in the implementation of their environmental and climate initiatives. Similar concerns may arise from existing provincial carbon levies and Canada’s proposed national carbon tax of $50 per tonne by 2022, and should be considered as Canada proceeds with the design and implementation of a carbon tax unlikely to be in step with Mr. Trump’s energy platform.
• Mr. Trump indicated that he intends to pull back renewable incentives and permit market forces to determine the electricity generation mix. Such an approach likely favours coal-fired and natural gas generation, resulting in higher greenhouse gas emissions, but also a reduction in generation costs and, as a result, lower power prices to consumers. Lower power costs to energy-intensive US industries would further the competitive disadvantages to Canadian industry. However, many US renewable incentives come from individual states rather than federal policy, and this, along with the steadily dropping cost of renewable power could mitigate the impact of changes to US energy policy on renewables and the electricity supply mix.

Tax Implications:

• The most significant impact of the election from a tax perspective is that prospects for comprehensive US tax reform are better than they have been for many years. There will likely be significant tax cuts for business. The tax rate for all businesses could drop from 35% to 15%. At the same time, there could be significant base broadening by eliminating many corporate tax expenditures. Businesses would be able to elect to expense certain investments rather than to depreciate their cost over time but, if they do so they would not be able to deduct interest expenses.
• Other expected developments in taxation that would benefit business, include:
  • The expected reductions in the corporate tax rate would reduce the incentive for US firms to earn income offshore (including in Canada) or to move their tax residence (i.e., corporate inversions).
  • Corporate profits held offshore would be subject to a one-time deemed repatriation at a 10% rate.
  • There would be significant tax cuts for individuals. There would be 3 tax brackets (down from 7): 12% for married joint filers with taxable incomes below US$75,000, 25% percent for incomes between US$75,000 and US$225,000 and 33% for income greater than US$250,000 (for single filers, the thresholds are 50% of these amounts). The 3.8% tax on net investment income, enacted as part of the US Affordable Care Act, would be repealed.
  • The taxation of carried interest (i.e., the income of certain investment managers currently taxed at capital gains rates) would be modified.
  • Estate and generation-skipping taxes would be repealed but, similar to the Canadian system, accrued capital gains at death would be subject to tax.

Potential Deregulation of Financial Services:

• Based on statements made by Mr. Trump during the election campaign and market speculation since the election, the new Trump administration may seek to enact some degree of deregulation of financial services, including possibly seeking to repeal all or portions of the Dodd-Frank Act which was enacted following the 2008 financial crisis. The scope of any such financial services deregulation remains uncertain at this point. If such deregulation comes to pass, Canadian financial services companies with operations in the United States or otherwise subject to oversight by US regulators or the provisions of Dodd-Frank (such as the Volcker Rule) could become subject to lower degrees of regulation.

Ongoing Analysis:

• In the coming days, you will hear more from McCarthy Tétrault’s experienced lawyers on matters related to the US election, those discussed above and other issues, as they continue to evolve.
• Please do not hesitate to reach out to me or to any of your contacts at the Firm regarding any post-election changes affecting Canada’s most important trading partner and the impacts they will have on your business.

Dave Leonard, Chief Executive Officer
McCarthy Tétrault
(416) 601-7694
[email protected]