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5 Minutes for Business: Hammering Business – Finance Canada’s New Crackdown

These are not tweaks! The government has just proposed the most radical tax overhaul in 50 years. We’re particularly worried about the impact on business from (1) a new tax on investment income in a corporation and (2) tough new rules for compensation in family businesses. Why is the government doing this?


The Minister says it’s all about “fairness,” and his consultation document compares the tax treatment of a business owner with that of an employee to point out corporations have “unfair” advantages. But, the comparison makes no sense—there are good public policy reasons for why owners are taxed differently.


Because unlike an employee, a business owner doesn’t get a pension or health benefits or vacation pay. She invested her own money to get the business started. Or, she pledged her personal assets (house, car) as collateral for a loan. She has employees who depend on her. And, if nobody wants her goods or services next month, she does not earn a penny.


That’s why in every advanced economy in the world, businesses can accumulate and invest after-tax retained earnings so they have money to get them through an economic downturn or to make big capital investments. One owner told us, “I keep most of the earnings in the company because we’re trying to grow and because in construction, we go through tough cycles when business dries up.”


The government wants to tax “passive” (invested) income. It says it’s a crackdown on “high income individuals,” but the rules would apply to all incorporated businesses in Canada, most of whom are restaurants, retailers, farmers and consultants—to punish them for saving and investing. It gets worse!

 

Finance Canada also expects to raise $250 million by cracking down on “unreasonable” salaries paid to family members, which it says diverts corporate income into lower tax brackets. But, to pull in $250 million, CRA will have to tax over $1 billion in salaries and audit hundreds of thousands of businesses. Imagine the litigation! You’re paying your spouse $80K, but the CRA believes he or she should only be earning $50K. Do you go to Tax Court? An owner told us, “if my son had not worked 12 hours a day, my business might not have succeeded. Painting us all as cheaters is unfair and discriminatory.”


Incredibly, Finance Canada has managed to design a set of tax measures that would hit the maximum number of businesses in the most complicated way for a small amount of revenue. The expected $250 million is less than 1% of the federal deficit.


Nobody supports tax evasion or loopholes. But these changes will punish legitimate businesses. And, they come after the government cancelled reductions in the small business tax rate, tightened rules on partnerships and started taxing work in progress. That’s on top of new carbon taxes, raised CPP premiums and an increase in the EI rate. Our members are asking why this government keeps raising taxes on business.


We’re not sure what to tell them, but there is an important test ahead. Finance Canada has launched a consultation even though it is clearly determined to move forward—the legislation is already drafted. So email or call your local MP to tell him/her the government is proposing to hammer business with tax changes that will hurt families and punish
entrepreneurs. Only MPs have the power to slam the brakes on Finance Canada’s runaway train.


For more information, please contact :
Hendrik Brakel
Senior Director, Economic, Financial & Tax Policy
613.238.4000 (284) | hbrakel@chamber.ca
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5 Minutes for Business: The Explosive Debate around Minimum Wage

Big increases to minimum wage are becoming fashionable in Canada: first Alberta (from $12.20 currently to $15 in October 2018), then B.C. (from $10.35 to $11.35 in September 2017) and now Ontario (from $11.40 to $15.00 in January 2019, a 30% hike in 18 months). Are workers better off or does it mean fewer jobs?


The debate has been ferocious because economists don’t agree, but let’s look at the fundamentals. The government accepts that carbon taxes are effective at reducing emissions because if you make something more expensive, people will use less of it. We agree, but the same logic must apply to wages. And, actually, a business owner faced with the rising cost of an input (labour) has three options:

  • Absorb the added cost out of her profit margin
  • Raise prices
  • Reduce use of labour by substituting in morecapital or simply making do with less work

Let’s take these in order. Some businesses are so spectacularly profitable that owners can just absorb rising labour costs. But Apple and Microsoft don’t use minimum wage labour. If we look at profit margin by industry, the biggest users of minimum wage labour are in retail and food service, with razor thin (below 3%) margins. There is very little room to absorb these costs, and if a business is not profitable, there is not much point in keeping it going.


What about raising prices? The critical ingredient in business success is getting the right price point for your market. One restauranteur told us that the lunch menu in her neighborhood has to be $5-$8, any higher means flirting with disaster. In retail, the competition is with online giants, like Amazon. Often, there is no room to raise prices without driving away customers.


The third option to cope with rising wages is making do with less staff. This is controversial because many studies show that minimum wage can be increased without a corresponding rise in unemployment.

 

That’s why the recent Seattle study produced such a bombshell. Washington state collects detailed data on hours worked and it showed how part time workers with irregular schedules are cut back. Seattle’s minimum wage hike reduced the total hours worked by the low-wage workforce by about 9% while raising their wages by only about 3%. The net loss to workers was an average of $125 a month. This is a big, immediate hit to the most vulnerable workers.


In the long-term, minimum wage hikes can also drive labour-saving capital investment. The former CEO of McDonald’s told Forbes, “demands for a much higher minimum wage would force businesses with small profit margins to replace full-service employees with costly investments in self-service alternatives.” At the time, labour groups accused business owners of crying wolf. McDonald’s is now rolling out touchscreen selfservice kiosks across Canada and the U.S.

 

There is some evidence that modest increases in minimum wage can be done without disrupting labour markets, but governments have to be cautious about hurting competiveness. Previously, I had said there are three options to deal with rising costs, but there is actually a fourth and a fifth option: shut down or move to a different jurisdiction. Let’s provide input to the Government of Ontario to prevent this from happening. The Ontario Chamber of Commerce has
done some great work on this issue and has a report that can be viewed here.

 

For more information, please contact:

Hendrik Brakel

Senior Director, Economic, Financial & Tax Policy

613.238.4000 (284) | hbrakel@chamber.ca

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The Reality of Bill 148

The Liberal government wants to introduce a minimum wage increase to $15 dollars an hour by 2019. This isn't a move that best helps the people of Ontario nor is it the right move. Funny enough... These newly reformed labour laws won't fully come into effect until AFTER the provincial election is over with. Is it about helping the people of this province? Or is it a move for someone to keep their Premier job?

 

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5 Minutes for Business: How Europe Got Her Groove Back

Poor Europe! She suffered years of economic stagnation and austerity. Costly government bailouts and a drawn-out banking crisis sapped her confidence. Terrorism and an unprecedented surge of migrants poisoned political debate and encouraged extremists. The final insult came when the British voted to leave her.

 

By the end of 2016, popular wisdom was that Europe’s politics were so shattered and her people so fed up, that upcoming elections would see right-wing extremists swept to power from France to the Netherlands, Austria and Italy. Even the gentle Scandinavians were eager to elect loons!

 

Except that didn’t happen. The elections came and went. The Austrians and the Dutch elected moderates by healthy margins. The Trudeau-like French centrist Mr. Macron won the French presidency by a staggering 30%, in a victory so crushing that his opponent Mme. Le Pen announced her intention to change the name of her political party. Far from a wave of Trumps, Europe is governed by sensible moderates (with the exception of Orban in Hungary).

 

And recently Europe’s economy has gone from strength to strength. All 28 members of the EU saw growth last year, and this will continue through 2017 and 2018.

 

In the first quarter of 2017, the European Union’s economy grew at a healthy 1.9%, more than double the U.S. quarterly growth of 0.7%. European business confidence is near an all-time high for manufacturers and services. More importantly, business is spending – European investment will grow by 3% this year and 3.5% next year. And best of all: European consumers are a happy bunch with low debt levels and money to burn. Last week, consumer confidence hit the highest level since June 2007. Happy days are here again!

 

Canadian businesses see the opportunities. Hudson’s Bay will invest $570 million in Europe this year and are targeting sales growth of 20%. The CEO Jerry Storch says profits will grow even faster than sales.

 

So far in 2017, some of Canada’s fastest growing export markets can be found in Europe. Exports to Germany are up 9%, sales to France are up 14% and the Netherlands are up 10%. And Canada’s investments in Europe are even larger. The total sales by Canadianowned companies operating in Europe exceeds $100 billion. That’s more than triple the value of Canada’s direct exports to the region.

 

Investors have noticed that Europe has her confidence back, and she’s even got a bit of swagger. When Mr. Trump promoted Brexit to other EU countries, the President of the European Commission Jean-Claude Juncker said “I’m going to promote the independence of Ohio and Texas.” Europe has also started flexing her muscles and is about to embark on a new defence spending spree.

 

And thanks to far-sighted trade ministers, Ed Fast and Chrystia Freeland, the Comprehensive Economic and Trade Agreement (CETA) will come into force soon. We’ve all been so focused on the NAFTA renegotiation and those fabulous 3 a.m. tweets. Let’s not lose sight of a spectacular opportunity for Canadian business. With 500 million people and GDP of $18.5 trillion, the EU is the world’s largest economy, so a return to stability and growth will have a stimulating effect on the whole global economy. Welcome back Europe!

 

For more information, please contact :

 

Hendrik Brakel Senior Director, Economic, Financial & Tax Policy

613.238.4000 (284) | hbrakel@chamber.ca

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5 Minutes for Business: Fast and Furious—Negotiating NAFTA

Tick-tock! The U.S. Trade Representative just sent the official notification to Congress that NAFTA negotiations will begin in 90 days. The Canadian government must now negotiate and resolve all the hot button issues with our American and Mexican friends—in the midst of a highly charged political environment. How will it play out?

 

For the next 90 days, every special interest and aggrieved Wisconsin dairy producer will have a chance to provide input during the consultation period under Trade Promotion Authority. Then, whatever new agreement is negotiated must pass the House and the Senate. All three governments want NAFTA 2.0 wrapped up ASAP. Canada wants to end the uncertainty that is hurting investment, and for our partners, it is even more urgent.

 

Mexico’s presidential election is set for July 2018 and will be in full election season by the early spring. Polls show the current leader is Andres Manuel Lopez Obrador, a fiery left-wing nationalist who filed a human rights complaint against Mr. Trump and his plans for the border wall. He calls it embarrassing to see the current Mexican government prostrate before Trump. Mexico’s government would dearly love to conclude the NAFTA well before the election.

 

Similarly, U.S. mid-term elections will be held on November 6, 2018, and Republicans need to show progress on trade. The likelihood of NAFTA passing Congress drops off significantly after the mid-terms.

 

Gallup points out that when the U.S. President has an approval rating below 50%, his party loses an average of 36 seats during mid-term elections. President Trump’s approval rating is well south of 50%, in the high-30s. If the administration remains mired in scandals, special counsels and the Russian Connection, the Republican house is likely to lose its 31-seat majority. Would a newly-elected Democratic house be eager to pass Mr. Trump’s NAFTA?

 

No way. Is it even possible to renegotiate NAFTA before the deadlines? The original Canada-U.S. FTA took 18 months (May 1986 to Oct 4 1987), and our governments at the time were the closest of friends.

 

So it’s possible but very unlikely because of the politics. We often hear from Americans that Canada is not the main target of U.S. trade ire. Canada just needs to give the Trump administration a PR win, which it defines as a big give on supply management and softwood lumber, then it can have whatever it wants— regulatory cooperation, movement of people, maybe even an exemption from Buy American.

 

But the politics are awful because Mr. Trump’s bullying, blustering threats have made it impossible for Mr. Trudeau or Mr. Pena Nieto to agree to concessions without appearing weak. Their supporters despise Mr. Trump and would be furious. And even if it wasn’t politically poisonous, why should we make concessions for another country’s domestic politics?

 

There may be another way. The USTR referred to NAFTA modernization as opposed to renegotiation. In the past, NAFTA has been amended extensively without going back to Congress. We could add a chapter on ecommerce, fix the rules of origin and sign a bunch of side letters that could give the Americans the win they need. Let’s hope they take what they can get. Otherwise, NAFTA 2.0 is doomed.

 

Hendrik Brakel

The Canadian Chamber of Commerce

Senior Director, Economic, Financial & Tax Policy

613.238.4000 (284)

hbrakel@chamber.ca

 

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Exiting Europe and Terminating NAFTA – Have our Trading Partners Lost it??

From Europe to the U.S.A., our largest trading partners are burning up with anti-trade fever. Is it a short-term flu of harmless populism or the most destructive strains of anti-globalization since the 1930’s?

 

Last week the Trump Administration leaked a draft executive order to withdraw the U.S. from NAFTA. “I was all set to terminate,” Trump told the Washington Post “I looked forward to terminating. I was going to do it.” What changed his mind?

 

He backed down after an uproar from U.S. business groups, ferocious blowback from Congress (Senator John McCain said it would be a “disaster”), and calls from the leaders of Canada and Mexico. Apparently the decisive factor was a map of the United States showing the areas that would be hardest hit from cancelling NAFTA and highlighting that many of those counties, particularly in agriculture and manufacturing had voted Trump last November. The blustery threat and same-day retraction inflamed public opinion in Canada and Mexico, so that it will be even harder for those governments to make concessions to the U.S. What could be nuttier?

 

Frexit. If France elects a President dedicated to exiting the European Union and abandoning the Euro, it would be much worse than Brexit, perhaps leading to a break-up of the EU. Should we be worried?

 

We will find out on May 7th when the people of France vote in the second round of the Presidential election. The parallels with the U.S. are striking – Marine Le Pen presents herself as a champion of the oppressed working class, les oubliés (“the forgotten”) and she promises to stop immigration, withdraw from the EU, and impose tariffs to protect French business. Her opponent, Mr. Macron is in the centrist Hillary position with somewhat vague promises that are proEU and include investments in training, along with more flexibility and lower taxes for French business. Mr. Macron has a massive lead in the polls, but analysts point to severe trauma in the French political system. From the Euro crisis and bank bailouts, to an influx of migrants, economic stagnation, and terrorist attacks, the French have never been more disenchanted with their elites. In fact, both of the major parties (the equivalents of the Liberals and Conservatives) were eliminated in the first round.

 

There’s been much talk about a world-wide trend of government elites losing to anti-trade populists, but don’t count on a big win for Madame Trump. Extremist candidates were defeated in the Netherlands and Austria, because of concern about the economic consequences and also because messages of openness do resonate. Polls show that significant numbers of Trump voters and Brexiteers are experiencing regret.

 

Personally, I think Ms. Le Pen has pushed her luck too far with a promise to exit the Euro. This means that all financial assets, debts and pensions would have to be converted from Euros to some new currency to be introduced by Ms. Le Pen. Hear that, French seniors? Your life savings could be devalued and switched into new Francs from the Front National. Good luck.

 

That’s the point of Brexit, Frexit, threats to withdraw from the EU/NAFTA and trade wars generally. It’s lots of fun to bluster and bash trade, but there are real consequences and real job losses. Sometimes we only see the benefits of free trade when someone threatens to take it away. So let’s hope the French come to the same conclusion as so many Dutch, Austrians, remorseful Brits and American businesses to embrace openness. Because despite all the uncertainty, faster growth in global trade is just around the corner.

 

For more information, please contact:

Hendrik Brakel,

Senior Director, Economic, Financial & Tax Policy

613.238.4000 (284)

hbrakel@chamber.ca

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The City - Proposed LRT

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Gaslight District

In this edition ofthis weeks V-Blog Greg discusses why it will not only keep the heritage aspect intact but also put a new spin on the area for our futures. Not only our futures though. It will benefit our grandchildren's future as well. This will be a district unlike any in Ontario. So check out this video and support the Gaslight District.

 

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What to Expect When You’re Expecting (a Federal Budget!)

Can you feel the excitement in the air? A brand new federal budget is about to be delivered into the world. A precious bundle of joy, full of hopes, expectations and the future of the Canadian economy will come screaming into the House of Commons in a couple of weeks. So what should we expect?

 

Three big things are keeping us on the edge of our seats. This baby will have larger deficits than last year amid economic uncertainty. She’ll be full of exciting details around previous announcements—the innovation agenda, the infrastructure bank, the FDI hub. Finally, we’ll see some nasty surprises coming from the review of tax credits. Wahhh!

 

The budget is unusually late this year. We’re now expecting it on March 21, after a number of delays. Pity the poor Finance Department. Last year’s budget was hit by a sharp decline in oil prices and an economy that was weaker than expected. This year’s budget is upended by Hurricane Trump—normal expectations around trade and business investment are out the window.

 

There is now more uncertainty than we’ve seen in decades, and the federal government has run out of fiscal room. The deficit will reach $26 billion this year, and that’s before the additional costs for new health deals with the provinces. For years, we’ve advocated balanced budgets, or at least a solid plan to return to balance. The Finance Department’s current forecasts show this will not happen before 2050. (This baby will be middle-aged by then.)

 

Growing deficits make it unlikely that we’ll see any large new programs. Instead, this budget is likely to fill in details around previous announcements. Remember, Budget 2016 left many of the tough questions to be filled in after consultations. The government had said Phase 2 of the infrastructure plan, with the “fast, efficient trade corridors” would be announced in the next year. The Innovation Agenda, a “bold new plan” to redesign how Canada supports innovation, was coming later. Health spending would be determined. A review of tax expenditures was coming soon.

 

We’re excited about the innovation program, but it’s that last promise that has us most worried. The government announced an internal review of all federal tax credits, with a view to eliminating poorly targeted and inefficient ones. A panel of external experts is in place, but there has been no consultation.

 

We certainly support simplifying the tax system, but some of these tax credits are very important to business and Canadians. For several months, we campaigned vigorously to oppose a plan to tax employer-sponsored health and dental plans. The plan would have cost workers thousands of dollars and was only abandoned by the government after tens of thousands of emails and negative media.

 

The government is looking for revenue so we’ll likely see a few unpleasant surprises in the budget. It would be odd if the government reviewed 150 tax credits and decided to keep all of them. So, we just don’t know if the capital gains inclusion rate, the federal dividend tax credit or flow-through shares might be on the chopping block. We’ll be watching the budget closely to determine the positive (innovation agenda, infrastructure) and negative impacts (tax credits and deficits) on business. I’m worried this baby could be adorable and smiling on the surface but with some smelly surprises hidden away.

 

For more information, please contact:

Hendrik Brakel

Senior Director, Economic, Financial & Tax Policy

Canadian Chamber of Commerce

613.238.4000 (284) | hbrakel@chamber.ca

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Billion with a B

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