The idea has stirred outspoken opposition from some corporate leaders and muted anger from others—but it has a key supporter at the highest level of government. At the national economic conference in Ottawa last month, Prime Minister Brian Mulroney visibly brightened when Antoine Turmel, the chairman of Montreal-based Provigo Inc., suggested that the federal government eliminate a 14-year-old tax break that lets companies deduct from their profits any interest paid on money borrowed for corporate takeovers. After Turmel finished speaking, a smiling Mulroney asked, “Have you read my book?” In Where I Stand, a 1983 text in which he outlines his political views, Mulroney, then the opposition leader, said that the tax break should be ended because it encourages only “useless empire-building.”
Mulroney’s response has sparked a debate over the merits of the tax break and led some observers to speculate that the provision may be removed in the May federal budget. Critics say that by allowing the deduction Ottawa has encouraged large companies to take over existing firms, increasing corporate concentration. (In 1984 nine Canadian families controlled 46 per cent of the top
300 companies traded on the Toronto Stock Exchange.) As well, takeovers do not necessarily create new production or jobs. Said Stanley Hartt, the Montreal corporate lawyer who organized the economic summit: “In very few cases has a takeover generated a net boost for the economy—it just put the ownership in new hands.”
Last year in eight major acquisitions Canadian companies spent more than $800 million to purchase other firms. And because most big-time corporate shoppers are in the 46-per-cent tax bracket, the interest-deductibility provision cost Ottawa millions of dollars in forgone taxes.
But most business executives support the tax measure. William Fatt, vice-president and treasurer of Toronto-based Hiram Walker Resources Ltd., pointed out that many entrepreneurs deliberately build up companies, fully intending to sell them later. “There are people in Canada
who do best by creating,” said Fatt, “and there are others who are better at managing. If the people who develop things have no market in which to sell them, then you will have less development.” Even some opponents of the tax incentive agree that Ottawa should not drop it unless Washington eliminates a similar U.S. law. Congress is currently considering a bill that would prevent U.S. firms from deducting interest on money borrowed for hostile takeovers (defined as those opposed by most of the target company’s directors). Hartt, for one, said that if Ottawa acted before Washington, U.S. firms would have an edge over Canadian companies on corporate takeovers —espeje dally since there is no I longer a Foreign Investís ment Review Agency impeding their entry into Canada. Added Hartt: “If we had a strong FIRA, it would be another matter. But we just dismantled it.” Still, those misgivings may not deter Mulroney from moving quickly to stop what he has called “nonproductive corporate takeovers.” -MARC CLARK
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