Challenges abound for Canadian business owners looking to move manufacturing to the U.S.

Carson Hamill CIM®, CRPC®, FCSI® Associate Portfolio Manager and Assistant Branch Manager, was featured in a Globe and Mail article. CLICK HERE to read the Globe and Mail article on their website.

Business owners must examine many factors, including tax regimes, labour rules, availability of skilled workers, real estate prices, supply chain impacts, customs impacts, legal expenses and financing expenses before moving manufacturing to the U.S. THE CANADIAN PRESS/Rob GurdebekeRob Gurdebeke/The Canadian Press

Even before the latest round of tariff-focused headlines, many Canadian manufacturers were responding to trade uncertainty and the competitive pressures U.S. President Donald Trump imposed on Canada by moving production to the U.S.

Now that the U.S. will introduce new 50-per-cent tariffs on Canadian alcohol, dairy and hundreds of additional products, interest is expected to intensify.

“The recent announcement reinforces that tariffs are no longer viewed as a short-term issue and are instead becoming a factor in long-term business decisions about where to invest and expand,” says Kris Rossignoli, senior private wealth manager with Cardinal Point Capital Management ULC in New York.

According to a recent KPMG LLP survey of 275 Canadian manufacturers, 29 per cent had already moved some or all production to the U.S. and 13 per cent were considering it. That means around four in 10 are facing the business and personal financial planning complexities of a cross-border transition, with that number poised to rise.

“It’s a common discussion now in which we’re talking to a Canadian business owner every couple of days about a potential move to the U.S. or an expansion to the U.S.,” Mr. Rossignoli says. “It has really picked up over the past two years.”

One question business owners must answer before making a cross-border move is whether it strengthens the company, after considering all costs.

That means examining many factors, including tax regimes, labour rules, availability of skilled workers, real estate prices, supply chain impacts, customs impacts, legal expenses and financing expenses.

Also, the U.S. offers multiple corporate structures, so it’s important to consider the options and determine what works best for a specific company.

“Then, the owner needs to ask, ‘What happens to my family and me?’” Mr. Rossignoli says. “‘Do I want to spend more time in the U.S.? Do I have an immigration path to be able to do that? What’s the timing on that? Will key members of the family move with me? What about key executives of the business?’”

The personal financial planning impacts of moving south of the border include U.S. state and federal tax exposure, as well as significant estate planning repercussions.

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Meanwhile, giving up Canadian tax residency incurs a departure tax on the deemed disposition of specific assets, including the business owner’s private company shares.

Many business owners invest a nominal amount in their corporation’s initial shares, which means a very large taxable capital gain if the company has experienced healthy growth over the years – although Mr. Rossignoli says some strategies could potentially reduce the value of the corporation for departure tax purposes.

Examples include distributing excess cash or investments from the corporation, paying available tax-free dividends, repaying shareholder loans or setting up a retirement compensation arrangement. These steps may reduce the corporation’s net asset value, but can also trigger corporate or personal taxes.

In addition, an estate freeze can cap the owner’s current share value and shift future growth to other shareholders or the next generation remaining in Canada. However, it generally won’t reduce value already accrued.

“Any plan must be completed before departure, supported by a proper independent valuation and reviewed carefully under both Canadian and U.S. tax rules,” he says.

Planning is also needed for non-registered and registered investment accounts. For example, U.S. residents are subject to restrictions on buying or owning foreign investments, and the U.S. does not recognize the tax-free status of TFSAs, while rules vary by state on whether RRSP growth is tax-deferred.

What if it doesn’t work out?

Carson Hamill, associate portfolio manager and assistant branch manager with Snowbirds Wealth Management at Raymond James Ltd. in Coquitlam, B.C., worked with a client who moved his motorcycle business to Phoenix from Vancouver long before the U.S. tariffs on Canadian goods to take advantage of cheaper manufacturing and shipping as well as access to an attractive market without import/export complications.

“The [client] only lasted about five or six years [in the U.S.] and ended up shutting up shop, moving back here and [continuing to sell to U.S. customers] on the side because it wasn’t what they predicted,” he says. “They went in full throttle and it didn’t last as long as they anticipated.”

Even with good planning, unexpected business challenges – in this case, that included surprisingly high employee turnover and other operational issues – can get in the way. There may be personal obstacles as well.

Mr. Hamill says he has lived in the U.S. and notes that it’s a different lifestyle – and, of course, a manufacturing business is likely to be based in an industrial area that may not provide the quality of life someone wants.

Yet, moving manufacturing to the U.S. doesn’t have to be an all-in proposition that involves transferring the entire company and the business owner’s family south of the border.

Mr. Hamill has worked with clients who have set up subsidiaries in the U.S. while keeping the head office in Canada. That adds complexity, including taxes due in Canada and in the U.S., but it is an option.

Good advice is critical

Mr. Hamill says education and accountants make the difference for clients who successfully move part or all of their business to the U.S. Also, being slow and deliberative helps.

“Make sure you know everything before making the move,” he says. “Do your due diligence [and] know what you don’t know.”

Tightened U.S. immigration rules under the Trump administration are a significant stumbling block that business owners need to factor into their decision-making and timeline, he adds.

Meanwhile, from Mr. Rossignoli’s perspective, advisors with cross-border expertise can add a lot of value by modelling scenarios on an after-tax basis, connecting business owners with other professionals such as immigration lawyers and specialized accountants.

Then, once clients have decided on a course of action, advisors can guide them through the implementation of a strategy that protects clients’ business and personal interests.

“It’s extremely complex, and if you don’t set things up properly you can easily be subject to double taxation,” he says.

“It’s not just about the business. It’s reviewing everything from a comprehensive landscape. … It’s seeing how that one decision affects everything else and stepping back and looking at the combined business, tax, investment, estate, family and liquidity picture.”