The Wrap-up – NAFTA Negotiations and Tax Reformations

Winter is upon us in Winnipeg. Its arrival marks the end of an October that was strong for equities in Canada and the United States. Despite political wrangling, posturing and good and bad news on both sides of the border, the four major North American indices moved forward in October. In 1987, the Dow closed with its largest single day loss (23%) and the 30-year anniversary of Black Monday was observed on October 19^th.  The popular press drew parallels between performance October 19, 2017 and three decades ago, though the comparisons felt somewhat manufactured.

One of the largest news items that will affect the Canadian economy and our investment markets going forward is the continued lack of progress on NAFTA negotiations. The United States has insisted that all future disputes be settled in U.S. courts and under U.S. laws, which is an unacceptable, sovereignty-robbing condition for Canada. The supply-control system for agricultural products, particularly milk, is under threat as well.

This month, expect more difficult negotiations regarding NAFTA. President Trump will continue to make proclamations and issue ultimatums on issues that will be discussed at the bargaining table. The schedule of topics places most of the thorny issues toward the final rounds, which allows some initial progress on smaller items and encourages agreement on the larger issues since no one wants to destroy the progress that has already been achieved.

On a more positive note for many of our clients, the Liberal government’s plan to update tax legislation affecting small business owners, family businesses (including farms), and professional corporations has been tempered following public consultation. The final plan and legislation have not been written, but expect more balanced changes than originally proposed. When a clearer picture of the proposed legislation and its effects emerges, we will host an information evening with legal and accounting experts to discuss minimizing tax under the new system.

Some of the tempering of Finance Minister Morneau’s initially proposed plan may be driven by two noteworthy events. First, Morneau did not fulfill his commitment to place his investment assets inside a blind-trust, which would allow him to govern without understanding the direct impact of changes on his personal financial situation (the purpose of a blind trust in this situation is to prevent a legislator and cabinet minister benefiting from new law that is intended to benefit the country and its citizens).

Secondly, there was a hack of a Bermudian law firm that’s being referred to in the press as the “Paradise Papers” since the information originated from an exotic location. The Paradise Papers are indicating that many around the world, including prominent Canadian families and firms (Bronfman, Weston, Suncor, PetroCanada, etc.), have utilized complicated offshore financial vehicles to minimize taxes. Although no impropriety has been proven at this point, the mere existence of these vehicles for the richest Canadians while low-income and middle-class Canadians are being asked to pay more has reoriented some of the proposed legislation on tax reform.

Monetary policy in Canada and the U.S., specifically interest rates, will be closely watched in the upcoming months. Rates went unchanged by the Federal Reserve in October, but most analysts believe that a December rise is likely. The increased rate will affect existing open loans while making it more difficult to prequalify for large mortgage amounts. With new stress tests on mortgage lending in full swing, watch for a cool down in housing prices.

A little closer to home and a little further from financial matters, this Sunday the Winnipeg Blue Bombers will host their first home playoff game since 2011 (and their first ever at the new stadium). Let’s hope the Bomber faithful fill the stadium with loud and proud fans and the team can pull through with a victory. Go Blue!

Kevin

 

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