Tariff war threatens to speed drain of corporate money out of Canada

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The A at the front of the stock ticker for Barrick Gold Corp., a $44-billion mining company that trades as ABX on the Toronto Stock Exchange, stands for American. That word was dropped from the company’s name in the mid-1990s, but founder Peter Munk had named his company American Barrick in 1983 to make it more appealing to investors in the United States, according to a source who was close to him at the time.

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More than four decades after the company was founded with two small mines in Ontario and Quebec, Barrick is still chasing those American investors, with chief executive Mark Bristow disclosing in February that the Toronto-based company, which now has multiple mines in Nevada, may redomicile in the U.S., in part to be included in index-driven trading via the S&P 500.

It’s not the first time Barrick has considered a move to the U.S. as it has amassed significant operations there. But there is more to the story this time, with the gold company joining a growing list of companies and sectors reacting to a trade war and other policies advanced by the administration of U.S. President Donald Trump.

“With a thickening Canada-U.S. border and America’s decisive turn toward protectionism and mercantilism, coupled with lower taxes and a more attractive regulatory environment for business in the U.S., it is not difficult to imagine scenarios in which more than a few Canadian companies choose to move their head offices to the U.S.,” Jock Finlayson, a senior fellow at the Fraser Institute, said.

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Bristow told the media that Trump’s aggressive pursuit of foreign companies to become American may speed up Barrick’s decision to move south, something that was briefly floated but then quickly shelved in 2020 amid analyst estimates it could cost the company as much as $300 million.

Companies growing ties with the U.S.

Making it easier for Canadian companies to leave — something that’s long been happening through mergers and acquisitions and other corporate reorganizations — and the “hollowing out” of Canada’s capital markets and parts of its economy that would follow thrusts Canada into an “existential” crisis, analysts at TD Securities Inc. said in a note in February.

The ink was barely dry on prominent asset manager Brookfield Asset Management Ltd.’s head office move to New York from Toronto as part of a corporate restructuring in January, with the express purpose of broadening the company’s investor base and attracting additional trading through inclusion in key U.S. stock market indexes, when the TD analysts spotted a Feb. 11 regulatory filing by Canadian e-commerce champion Shopify Inc. that named a headquarters in New York for the first time.

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That and other items in the filing, including a change in the geographic segmentation of assets that favoured the U.S., led TD’s index analysts to suggest one of the country’s largest companies might also be considering ways to increase ties to the U.S. and exposure to investors south of the border.

“Make no mistake, each time a Canadian company becomes less Canadian, it is harmful to Canada’s capital markets as trading volumes will migrate to the U.S.,” the analysts said in a Feb. 18 note.

They went further a couple of days later, urging a response from Canadian policymakers, particularly amid the leadership vacuum in Ottawa with a prorogued Parliament as the Liberal Party of Canada elects a new leader.

“It is time for Canadian officials to wake up and fight back to defend against the company migration to the U.S. — this is Defcon 1 for the country that just celebrated its 65th year with a red maple leaf in the middle of its flag,” the analysts said.

Companies have been trickling to the U.S. for years

Finlayson, a former chief policy officer at the Business Council of British Columbia, said Trump’s policies, backed by the Republican-controlled House of Representatives, raise a pressing issue for Canada beyond the location of company headquarters and share trading: where its companies and entrepreneurs will choose to invest going forward.

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“This is actually what I am most worried about in current circumstances,” he said. “Trump is explicitly seeking to persuade global companies to invest more in the U.S. and, relatedly, to export less from non-U.S. locations. As America’s top trading partner, we are very much in the line of fire.”

That is not a good position to be in when large companies and capital market activity have already been trickling out of Canada for years.

For example, the oilpatch was shaken in 2019 when Encana Corp. announced a move to Denver from Calgary as part of a reorganization and name change to Ovintiv Inc., presided over by the oil and gas company’s American chief executive Doug Suttles.

At the time, the CEO cited the larger pool of U.S. investors and index trading, while analysts pointed out that Encana had been bulking up on assets south of the border, culminating in 2018’s $5.5-billion acquisition of Houston-based Newfield Exploration Co.

Some politicians in Alberta, meanwhile, blamed Ottawa, saying federal oil and gas policies under the Liberal government penalized the industry and gave it no reason to stay in Canada.

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The discussion heated up again last fall when Brookfield announced its head office plans, with predictions of an eight per cent bump in demand for the company’s shares from the move to the U.S. That was before Trump was elected and cranked up his tariff rhetoric, promising to bring economic pain to Canada in order to extract what he wants from his neighbour and largest trading partner.

Trump takes aim at Canadian business

While Trump billed the tariffs as a necessary tool to ensure lax border controls are beefed up to stem the flow of illegal drugs and immigrants into the U.S., most commentators view the claims as cover for another, unspoken agenda.

“The real reason may be to uproot Canadian companies to redomicile to the U.S. and transfer jobs to the U.S.,” Richard Leblanc, a professor of governance, law and ethics at York University in Toronto, said.

But the Trump administration’s protectionist rhetoric has focused more attention on why some Canadian companies were already anxious to increase their presence south of the border in some way, particularly those that already do significant business there.

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That drive has only become more appealing with Trump’s flurry of executive orders that promise greater incentives for businesses, such as the one signed in January that requires the repeal of 10 regulations for any new rule or regulation proposed by a U.S. federal agency.

Other business-friendly inducements include tossing out the rule that U.S. shell companies must disclose their beneficial owner, a key anti-money-laundering measure, and pausing enforcement of the Foreign Corrupt Practices Act, which contains anti-bribery rules. Trump has also suggested that only the U.S. should be able to tax American multinational companies that operate there.

Even if some of these policies are ultimately reversed or watered down, or if the tariffs are short-lived, Canada will likely be forced to reckon with the appeal for more Canadian companies to relocate to the U.S., whether by a slow drip or a flood.

“If we can navigate our way out of the trade/tariff imbroglio with the U.S., policymakers can then focus their attention on the country’s structural economic problems, which include the weakness of the corporate head office sector,” Finlayson said.

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In the decade between 2012 and 2022, nearly one in 20 Canadian head offices either closed or merged with another company, according to Statistics Canada. The latest figures released this week show that the decline, though small, continued in 2023, with the number of head offices down just shy of five per cent since 2012.

How Canada can fight back

There is no shortage of opinions on what Canada should do to counter the trend, from tying any government aid packages to offset U.S.-imposed tariffs to prohibitions on redomiciling in the U.S. to bringing back income trusts, a popular corporate manoeuvre that reduced income taxes, but brought a flow of foreign capital into Canada in the mid-2000s.

“If the tariffs come and governmental aid packages follow, governments should prohibit redomiciling to the U.S., put caps on executive pay, prohibit shareholder dividends, and expect workers to be retained during the aid,” Leblanc said. “Depending on the amount of the aid, governments can have the right to nominate a director to the board to oversee the foregoing.”

Using the rules built into corporate Canada could also keep some businesses at home, no matter how easy or appealing Trump makes it to increase redomiciling in the U.S., he said.

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For example, directors at Canadian companies must, by law, consider more than simply what’s best for their own shareholders, something enshrined in legal precedent and a relatively new section of the Canada Business Corporations Act, Leblanc said.

The section directs boards and management to also consider the interests of employees, creditors, consumers, governments, the environment and the long-term interests of the corporation in their decision-making.

“It has not been extensively tested, but it could be used as a basis for litigation if one or more Canadian stakeholders — employees, retirees, pensioners, creditors, consumers, governments — believe their interests were not considered properly in the decision to redomicile,” he said, adding there are arguably good reasons to remain located in Canada.

“Canadian companies enjoy the benefits of an educated and productive workforce, public health care, transportation, logistics and safety, resulting in lower input costs. Boards should think very carefully about any redomiciling, including obligations to Canadian stakeholders and reputation risk.”

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Other countries face an exodus, too

Canada is not alone in facing a hollowing out prompted by the allure of relocating in order to be included in U.S. index trading, which boosts demand for a company’s shares.

The United Kingdom’s FTSE 100 index lost companies such as Ferguson PLC and Smurfit Kappa Group PLC to the benchmark S&P 500 index over the past few years when the former sought a primary listing on the New York Stock Exchange and the latter merged with a U.S. rival.

There are also persistent rumours about larger and more emblematically British companies, such as BP PLC and Shell PLC, relocating their companies, or at least their primary listings, to the U.S. to help increase their valuations to those of their American peers.

Some German companies, meanwhile, have relocated across the border to Switzerland because of things such as lighter administrative burdens and lower taxes, Andreas Schotter, a professor of international business at the Ivey Business School at Western University, said.

Uniquely Canadian issues

But there are some unique factors in the Canadian economy that will make responding to the outflow more difficult, market watchers say. These include interprovincial trade barriers, a few heavily concentrated sectors such as telecommunications, banking and airlines that make competition and growth difficult for challengers and relative strength in limited areas like natural resources.

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“The existence of too many protected/oligopolistic markets … arguably dampens business innovation and impedes the ‘creative destruction’ process that is an important feature of thriving, market-based economies,” Finlayson said, adding that Canada’s regulatory system is ripe for an across-the-board overhaul if the country hopes to become more competitive.

“We need to dramatically reform the country’s increasingly costly and dysfunctional regulatory systems, notably around project reviews, environmental permitting, (and) homebuilding,” he said, noting the latter is primarily a municipal-provincial issue.

Canada only has a few “national champions,” such as Shopify, because these structural roadblocks hamper companies trying to grow from small to medium-sized and then from medium-sized to large enterprises, Finlayson said.

In the mining sector, Canada has arguably become the most “hawkish” among Western mining powers by creating conditions where junior miners are often starved of exploration capital and subject to lengthy approval periods, Andrew House, a partner at law firm Fasken Martineau DuMoulin LLP, said.

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He said this has pushed a growing number of mining companies to consider leaving the country.

“Was this the outcome we wanted?” House said.

Finlayson also suggested overhauling the tax system, a near-universal cry from the business community, which would shift the burden onto consumption and away from work, investment, innovation and savings.

Shareholder pushback can help

Despite the growing momentum behind the exodus to the U.S. that threatens to hollow out corporate Canada, one company’s recent decision to remain headquartered here illustrates how shareholders may play a role in stemming the flow.

Montreal-based trucking company TFI International Inc. reversed plans to move its headquarters to the U.S. within days of announcing it after shareholders, including the Caisse de dépôt et placement du Québec, pushed back on the plan.

Caisse executives said on a conference call the following day that they would not disclose what was said in private conversations with TFI’s board, but said it is important for the pension manager to have strong companies in Quebec and urged firms in the province to take a long-term view rather than focusing on short-term trade threats.

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Observers were quick to point out that the relationship between the pension manager and the companies in which it invests in the province is unique, given that contributing to Quebec’s economic development is part of the Caisse’s mandate. As a result, it’s far from clear the negotiated reversal would occur elsewhere in the country.

“That wouldn’t really apply to a Barrick or Brookfield because their holdings wouldn’t be the relevant block,” a veteran Bay Street lawyer, who asked not to be identified, said.

A group of analysts at TD Securities, led by Peter Haynes, recently laid out their own prescription to counteract what they fear is an opening of the floodgates to a one-way flow of capital to the U.S.

In a Feb. 18 report, they suggested the federal government bring back income trusts, which drew significant foreign capital to Canada in the early and mid-2000s until the popular investment vehicle was shut down in 2006.

A palatable way for income trusts to make a comeback would be to confine them to small-cap companies with valuations under $5 billion to ensure that large, thriving companies do not convert to the trust structure that would deprive the government of corporate taxes on funds paid out in distributions to unitholders, the analysts said, crediting the idea to Brad Dunkley, co-founder and chief investment officer of Waratah Capital Advisors Ltd.

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It was widely perceived that planned conversions by the likes of telecom giants BCE Inc. and Telus Corp. led the federal government to put the brakes on a ballooning market segment that had cost Ottawa an estimated $300 million in tax revenue by 2005.

Another measure that has been suggested is implementing tax breaks for investing in Canadian companies. TD’s analysts suggested something similar to the Quebec Stock Savings Plan, which was created in 1979 to promote investments in companies in that province.

Canadian IPOs

They also said all levels of government could require companies receiving research grants from them to go public in Canada if they eventually pursue an initial public offering.

“This is low-hanging fruit,” the analysts said.

While the IPO market has been sluggish across North America, Canada has been particularly quiet. There were just 25 IPOs on Canada’s public markets last year, with just $642.4 million raised in aggregate, according to figures released by CPE Analytics in January.

That total includes capital pools such as special purpose acquisition vehicles. Without those, the IPO tally shrank to 17 and gross proceeds of just $345.8 million, and just one of them, fashion retailer Groupe Dynamite Inc., was on the Toronto Stock Exchange.

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A research paper published by the University of Calgary’s School of Public Policy a few years ago blamed the persistent dearth of companies going public in Canada on a “regulatory and governance ecosystem that has grown increasingly hostile to and distrustful of corporate leadership,” touching on themes that are at the forefront of the conversation in Canada today as more companies look south.

“The problems with our public markets seem to fall into this gap between the recognition we need to get serious about economic growth and the vacuum of policy proposals,” Bryce Tingle, a member of the Alberta Securities Commission since 2022, a business law professor at the University of Calgary and one of the paper’s authors, said. “To actually compete with the U.S. would require real regulatory innovation.”

Despite the pain it causes Canada, it makes sense that companies with significant operations and shareholders in the U.S., which represents more than 25 per cent of global gross domestic product, will be drawn there, the TD analysts said.

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“These corporate decisions are not about the heartstrings,” they said. “Given that capital sees no borders, it is left to country leadership to fight back through incentives to keep these companies local and penalties for leaving. Unfortunately for Canada, we do not think this topic has gotten enough attention in C-suites and with government officials and regulators across the country.”

• Email: bshecter@postmedia.com

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