More Than Neighborly

Annoyed that the U.S. owned more than half of its industry, Canada's government last June proposed a bill to chase investors back across the border. It would have raised, from 15% to 20%, the taxes on dividends that most Canadian subsidiaries send to their foreign parents. Last week the architect of the measure retreated from his "Canadianization" policy. "We believe," said Finance Minister Walter Gordon, "that a greater sense of partnership between Canadians and investors abroad will be of benefit to both."

More than neighborliness was behind the government's withdrawal. Foreign investment in Canadian firms declined from a $600 million peak in 1960 to $130 million last year. Canada's economy has been surging, with the result that Canadians themselves have the wherewithal to buy a larger stake in their own industry. In addition, Gordon's plan to give tax reductions to foreign-owned companies that sell at least 25% of their stock to Canadians has met surprising success. Spurred by this incentive, subsidiaries as diverse as those of Du Pont and Reader's Digest have put shares on the block.

Perhaps the most compelling reason for Gordon's retreat was an implicit U.S. threat to retaliate. Had the 20% tax taken effect, the U.S. was prepared to raise its tax on the repatriated dividends of Canadian-owned subsidiaries operating in the U.S. to a prohibitive 30%. That would have crimped many far-reaching Canadian companies--including Moore Corp. (business forms), Clairtone Sound Corp. (hifi equipment), Hiram Walker and Seagrams--and might have forced some of them to move their headquarters to the U.S.

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