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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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Canadian Businesses Lose Billions of Dollars to Cyber Crime Each Year

 

The increasing frequency of cyber attacks is costing Canada billions of dollars a year and hindering our ability to compete in the global economy, says a new report from the Canadian Chamber of Commerce. Cyber Security in Canada: Practical Solutions to a Growing Problem finds that cybercrime is an increasing concern for businesses and proposes cooperation between government and the business community to improve security.

 

“A study from the Center for Strategic and International Studies found that Canadian businesses are losing over $3 billion a year to cybercrime,” said the Hon. Perrin Beatty, President and CEO of the Canadian Chamber of Commerce. “It’s not technology-savvy security experts committing these attacks. Anyone with a computer and an internet connection can now disrupt services or hold data for ransom. What costs a criminal $100 may end up costing a business millions in lost money, time and reputation.”

 

Small businesses are particularly susceptible to cyber attacks because they often lack the financial resources and technical expertise needed to protect themselves. “SMEs comprise 98% of the Canadian economy. Nearly half have been the victim of a cyber attack,” said Mr. Beatty. “Their focus is on recovery instead of prevention. Unfortunately, recovery is often not possible. The average cost of a data breach in Canada is $6 million. Most small businesses would not be able to survive losing a tiny percentage of that figure.”

 

The report’s release comes after the federal government’s 2017 budget included $1.37 million for the fiscal year to continue programs already in place for risk assessment of critical infrastructure but made no direct mention of cyber security. “Government can’t do everything but they need to play a leadership role in securing Canada’s digital landscape for everyone,” said Mr. Beatty. “We need a public-private approach to address this urgent challenge.”

 

The report, released at the Lockheed Martin Canada IMPACT Centre in Ottawa, lays out a path for closer collaboration between government and business on cyber security, including providing incentives for security innovations and developing programs to increase workforce digital literacy. “By creating a stronger, more resilient cyber security framework we can better protect both our businesses and our citizens,” concluded Mr. Beatty.

 

The Canadian Chamber of Commerce is the vital connection between business and the federal government. It helps shape public policy and decision-making to the benefit of businesses, communities and families across Canada with a network of over 450 chambers of commerce and boards of trade, representing 200,000 businesses of all sizes in all sectors of the economy and in all regions. Follow us on Twitter @CdnChamberofCom.

 

Guillaum W. Dubreuil
Director, Public Affairs and Media Relations
The Canadian Chamber of Commerce

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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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5 Minutes for Business: Are We Ready for the Next Generation of Small Business Owners?

Canadian business is about to go through an era of unprecedented upheaval. Is it an economic crisis? A climate calamity? A Trump presidency? It’s much worse: a mass-retirement of business owners!

 

A staggering 75% of small business owners will retire over the next decade, and $1 trillion in business assets will change hands. Are we ready?

 

The answer is a resounding no. Less than half of small business owners have succession plans and only 9% have a formal written plan. We often hear that owners don’t like talking about retirement. They’ve been leading their business for decades and it’s part of their identity. Many just assume that they will be able to sell the business or pass it along to kids when the time comes. And because it’s years away, the awkward discussion can always be put off to another day.

 

There are huge implications. For starters, inadequate planning will lead to a big tax hit. Many family businesses have concerns that they are treated unfairly. If an individual sells a business to an unrelated person, it’s considered a capital gain and subject to a significant exemption. However, when an individual sells a business to a family member, the disposal is taxed as a dividend at the top marginal rate. That’s because the Crown sees the cash remaining within the family unit and wants to avoid creating a costly loophole. It’s a tough issue—there is an issue of discrimination against family business. In fact, NDP Deputy Finance Critic Guy Caron has prepared the private member’s bill C-274 to address the “unfair treatment” of family transfers.

 

But financial planners tell us that Canada’s tax code is actually quite generous. If you set up a family trust, an estate freeze or other tax strategies, it’s possible to minimize your tax bill substantially. The problem is that this must be done years in advance.

 

The second big challenge is financing the succession. It can take years to find the right buyer with deep pockets to buy-out the retiring owner. Again, a lack of planning can force owners into a fire sale situation, and potential buyers need time to raise funds.

 

The Canadian Chamber recently passed a resolution asking that government small business financing programs be expanded so that potential buyers can access the funds to buy-out a retiring owner. It’s a great idea.

 

We sometimes focus exclusively on supporting startups, but it’s just as important to ensure the continued success of existing businesses. Consider the perspective of an entrepreneur: you could create a new idea from scratch, seek out customers who have never heard of you and hope against the odds to turn a profit. Or, you could take over a company that has been in business for decades, with a loyal customer base and a track record of profitability.

 

The point is that it takes years to plan, finance and implement a successful exit strategy—on top of the training and mentoring to prepare the business itself for transition.

 

That is why chambers and business associations must do more to encourage members to start early and create robust succession plans. Financial institutions and government agencies also must help fund the next generation of managers and owners. But it’s a big challenge for business and for the Canadian Chamber. If you have views on succession planning and/or on bill C-274, please email or give me a call.

 

Hendrik Brakel Senior Director,

Economic, Financial & Tax Policy

Canadian Chamber of Commerce

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