Category: Canada

All of this talk about Donald Trump liking Justin Trudeau in the media was a fantasy perpetuated by the current government to try to paint a picture of how we can “get along”.

Of course, the undercurrents were anything but – not only were there significant trade disputes ongoing (softwood lumber to name one), but the rumblings of NAFTA being pulled and other Canada-US relationship issues are significantly material issues that were not being given sufficient attention.

So now the USA is firing another salvo in the attempt to negotiate a better deal – steel and aluminum tariffs. This is part of a broader negotiation strategy relating to NAFTA and will continue to hurt Canada’s (and Mexico’s) economies because of capital investment uncertainty.

Already with the election of Donald Trump it is perfectly evident that relatively fewer want to invest in Canada when the relative risk/reward ratio is being seriously skewed by corporate hostility in both federal and provincial governments in Canada, coupled with a very business-friendly climate in the USA. This pressure will likely continue with the current presidency.

The gross incompetence of our existing federal government at getting anything done (other than throwing money down a black hole) will be costing Canadians dearly in terms of continuing to decrease our standard of living.

The math on trade disputes is pretty simple.

The United States represents the vast majority of the Canadian export economy (about 75%).

Canada represents about 15% of the United States’ trade exports.

As a result, the USA can inflict much more economic pain to Canada than the other way around. As a result, when the USA decides to tighten the screws (like they are with this speculated tariff on steel and aluminum), it is one more step to negotiating a more beneficial trade deal.

What does this mean for the markets?

Likely in Canada, a lower interest rate as the economy will slow further. This would also decrease the value of the CAD/USD pair.

I speculated this earlier in my 2016 annual report, but these options for the Canadian government are most certainly still in play:

1. Flow-through share deductions will be eliminated.
2. Employee stock option deduction will have a full, instead of half inclusion rate, OR the amount will be capped to some nominal amount (e.g. CAD$50k allowed or something).
3. Taxation of capital gains on principal residences is going to have some restrictions (time, or value) placed.
4. Partial inclusion of capital gains will rise (right now a Canadian taking a capital gain will include 50% of the gain as income; I speculate this will increase to 2/3rds or even 3/4).
5. I do NOT believe the non-tax exemption for private and public health plans will be scrapped. This would be a political nightmare for the government compared to the rather esoteric notions on the items, but this was floated around last year.
6. The GST will rise (probably to 7%).
7. Corporate income taxes, on large corporations, will rise.

The Canadian government is going to be more and more desperate for money – with rising debt and rising interest rates, the interest bite will expand once again (the debt is roughly $650 billion, so a 1% rise is a $6.5 billion interest hike on a $300 billion budget). It is also very unlikely the existing government will focus on cost reduction, hence, they will be looking at every corner to pick away revenues. The items above seem to be the lowest lying fruit, although they each will come with their own political costs. The botched implementation of a corporate tax reform on passive income was met with a significant amount of opposition. The politically easier route would be to simply rack up the deficits and not offend anybody, especially since there will be an election within 20 months.