Toronto is BIG news...
People sometimes forget that Toronto is the fifth largest city in North America and the world’s seventh largest financial centre, but its importance to the Canadian economy should not be understated.
Around 10% of Canada's GDP is generated by Toronto alone and the city’s financial industry is a key driver of the country’s economy, generating $13bn and supporting employment for nearly half a million people.
The city is now a bona fide international centre for business and finance and is considered the financial capital of Canada, since the five largest financial institutions of Canada, collectively known as the ‘Big Five’, have national offices in Toronto.
Writing in The Globe and Mail, Jennifer Reynolds, President & CEO of Toronto Financial Services Alliance, observed: “Financial services represent 8.5% of metro Toronto employment, up 25% since 2006, and 14% of the city's GDP. Toronto's strong pool of talent in financial services, almost 400,000 directly and indirectly employed professionals, coupled with the region's significant pool of technology talent, has also fostered growth in the city's fintech ecosystem. This valuable pool of talent is also increasingly bringing foreign financial institutions to Toronto.
“There’s the impact the sector has had on the growth and prosperity of Canada's small and medium-sized enterprises (SMEs). SMEs comprise 99.7% of all businesses in Canada and are in many respects the backbone of the Canadian economy. Much of Canada's reputation as a global leader in innovation is attributed to the opportunity that SMEs have to prosper. What is frequently lost in the narrative is the key role financial institutions play in the successful exploitation of the opportunities that Canadian SMEs represent.
“The financial sector extended $243bn in credit to SMEs last year, up 25% since 2011, primarily in the form of loans for working capital and capital investments. SMEs also raised $21bn in capital on the TSX venture exchange in 2016 providing larger equity investments for companies later in their development. Insurance, payments processing, risk management and trade services and expertise are also critical financial services that support SMEs. Without these services, a modern, dynamic and resilient economy is impossible.
“All of these elements have increased the prominence of Canada's financial sector and Toronto's ranking as a leading global financial center. The question is why is this strength not better appreciated internationally? In the context of this recent score card for the financial sector, combined with the open and stable social and political environment in Canada, there is a unique window to attract capital, business and talent to the sector, and especially to Toronto.”
An additional reason for this success is down to the cost advantages of operating in the Ontario capital. In KPMG’s Competitive Alternatives 2016 report (cited in Toronto Financial Services Alliance), which ranked 51 cities with a metropolitan population of at least 2mn, Toronto ranked fourth lowest, and first lowest among the major financial centers, in terms of typical business costs (labor, facilities, utilities, taxes, etc.) for financial services operations.
Corporate income tax rates are competitive, as are employee healthcare costs, and according to KPMG’s Special Report: Focus on Tax (2016), Toronto has the lowest total tax cost amongst major international cities.
All that remains for Toronto to fulfill its potential from a financial standpoint is to perhaps increase the global appeal of the city as an economic powerhouse, and there can now be no denying that it is a big player on the global stage.
Could Trump’s tax bill create problems?
In President Trump’s tax bill which was passed by the US Senate in December, the corporate tax rate was slashed from 35% to 21% and this somewhat negates the tax advantage that Canada has previously held over its southern neighbour, although the Canadian rate still stands at 15%.
As well as that, there is a provision which allows companies to fully expense their business investments until 2022, which could be real draw for companies looking to relocate.
The North American Free Trade Agreement negotiations are at an increasingly fraught stage as well, and the University of Calgary’s Jack Mintz, talking to The Star, says the two staples which have driven strong Canadian growth (i.e. a lower corporate tax rate, and free trade) both look to be in jeopardy.
“Foreign companies that operate in North America are now going to look at ‘do I invest in Canada, with a small population, small market, to serve the North American market, or do I go to the United States?’” he said.
“When they look at Canada they now see similar tax rates and similar burdens – and then they look at regulations in Canada, which are increasing as the US is reducing theirs.”
The US economy cannot sustain the planned cuts without adding a whopping $1.5trn to the national deficit and, according to Kevin Milligan, professor of economics at the University of British Columbia, the tax reform is “potentially not sustainable”.
He told Global News that that the US government would have to either ‘”trim spending or raise taxes back up in order to contain the fiscal bleeding”.
There is a strong incentive for companies to return to the US with the new tax plan, but with such a drastic tax change being difficult to predict, it remains to be seen how it will fully affect Toronto – and Canada as a whole – on a long-term basis.