Canada: Bite, Not Bark

From the tone of last spring’s election campaign, U.S. investors in Canada were led to believe that the Liberals’ Lester Pearson would provide a milder, more benign business climate than Conservative John Diefenbaker. But last week, when Pearson’s new government presented its first budget to Parliament, it became clear that while Diefenbaker only barked about “Canadianization” of industry, “Mike” Pearson was going to bite. Items:

> Effective immediately on passage, any foreigner who makes a deal to buy a Canadian company must pay a prohibitive 30% “takeover” tax on the sale price. In the last year alone, four major Canadian concerns were gobbled up by foreign interests.

> For companies already owned by foreigners, those that sell at least 25% of their stock to Canadians will pay only a 10% withholding tax on dividends to nonresidents—a cut from 15%, also effective immediately.

>Companies that do not reach the 25% level by Jan. 1, 1965 will be hit with a 20% tax on nonresident dividends—an increase from 15%.

> An accelerated depreciation schedule will go into immediate effect for companies with 25% Canadian ownership.

> Building materials and production machinery, much of which Canada buys from the U.S. at the rate of some $250 million annually, will no longer be exempt from sales tax—a move calculated to give Canada an extra $70 million in revenue this year.

Up to now, U.S. investors have provided 80-85% of Canada’s foreign investment capital and in turn control about 55% of all Canadian industry. The new taxes will probably decrease the overall rate of U.S. investment somewhat. Both Washington and Wall Street regarded the moves as clearly discriminatory. But most investors and government officials were inclined to wait and see how much they hurt and how disheartening the hurt would turn out to be. Considering the continuing U.S. deficit in international payments, there could conceivably be a benefit in having at least a few U.S. dollars turned back at the border. Yet that effect might be offset by the new sales tax on building materials, which could seriously hinder U.S. export sales to Canada.