Canada's Economy: Not Exactly Healthy

If you are a worker, you already know that Canada's economy is a mess.  The only people who don't seem to know it are at the top.

Press Progress published a very detailed analysis of how messed up our economy is today.  A few of the highlights:

First, the good news: Corporate Canada's profits have hit a 27-year high, according to a new report by CIBC World Markets. Bay Street has never been happier, right? 

Well, there's just one little catch: new Statistics Canada data shows the Canadian economy shrank in January. All those layoffs and store closures you've been hearing about lately? "Ugly" retail sales? That stuff.

Yeah ... "that stuff".  If you work in retail, you've probably been smelling the rot that's been happening as hours of work are cut further and further in stores, although strangely the execs in head office don't seem to be taking pay cuts, or the quality of product being brought in has nosedived at about the same rate that sales have been tanking.

In Calgary (and the rest of Alberta), we've been experiencing enormous numbers of layoffs in the oil patch.  Not hundreds of jobs, but thousands of them lost.  One thing to notice though, is that the people at the top are not the ones bearing the brunt.  It is contractors and middle tier workers carrying the burden.

In Alberta, we are being fed the line that "corporate tax hikes will kill jobs".  This is a straight up lie, and we all know it.  It's a gambit play by the wealthy to keep as much money as possible, at the expense of Albertans.  It is not merely a matter of raising the tax rate, but also closing up all of the escape hatches used to funnel revenues out of Canada.  You earn a dollar here, or on our resources, you pay a fair price for it.  Current corporate taxation and royalty regimes in Alberta definitely are not reasonable, especially when we compare ourselves with say, Norway.

There's a point to this.  It isn't just that we are losing jobs in retail, or that the oil patch in Alberta is tanking.  It is that we have had a uniquely narrow-focused government which has been paying off their big donors (big business and the executive classes).  It isn't Canadians who have been winning, it is the wealthy who have been winning, at the expense of Canadians.  Alberta hasn't put a plug nickel into the Heritage Savings fund in ages.  Why?  Because our governments have been happily handing money over to the corporate world in the name of "jobs".

Jobs, which I will point out, are at best conditional fictions on a good day.  Corporate Canada argues that taxes kill jobs.  This is a lie.  Downturns kill jobs.  Austerity budgets kill jobs.  The speed with which layoffs and cuts begin the minute there is a downturn of any sort tells us a great deal about how much those jobs are really worth.

Canada's governments need to start looking out for Canadians.  Not Canadian corporations, not international corporations.  Canadian citizens.  Period.  Anything else is a disservice to the people that our government is elected to serve.

A Little Heresy - Alberta Style

So, according to Premier Prentice, the downturn in oil prices is going to create an $11 Billion hole in provincial revenues, and is now talking about putting the brakes on all kinds of infrastructure spending, including a new cancer hospital in Calgary.

Okay, that's a significant chunk of change.  Let's talk about this for a moment.

As the leader of the governing party, Mr. Prentice has a responsibility to all Albertans to ensure that the machinery of government continues to operate smoothly.  Over the last 25 years, we have seen the government make further tax cuts all over the place, in particular to the benefit of corporations, but also introducing a rather ridiculous 'flat tax' income tax scheme.

Every time, the government has tied itself even more so to the revenues from resource royalties to fund programs.

Mr. Prentice, you want to balance the books?  Here's how you do it.  Take a long look at all of the possible revenue sources the government has access to.  Not just tar sands royalties (which are, a pittance because your predecessors cut them to almost nothing).

First, Mr. Prentice, you need to take a long, hard look at the taxation system.  Are the corporations who do business in Alberta paying their fair share?  No?  Then we need to design a taxation system that ensures that they do, especially since so many of the corporations are basically funnelling monies out of Alberta and Canada as quickly as they can.

Second, we need to look at what the individual income tax system does.  Is a 10% flat tax ensuring that we are taxing incomes fairly across the board?  Or do we need to return to the graduated system that was developed in the 1950s?  (Hint:  probably)

Third, and here's where I commit heresy, you need to take a longer range view and determine the means to stabilize provincial revenues so that we are insulated from the vagaries of the resource markets.  This may mean, *gasp*, implementing a sales tax (like damn near every other jurisdiction in the world) that sits in line with the GST, but is not harmonized with it - we don't want to hand control over those revenues over to Ottawa either.

Oh yes, and you need to shed this fetish that conservatives have developed lately with "Public Private Partnerships" and start thinking about long term debt financing instruments like bond funds again.  PPPs just hang the taxpayer with long term operating costs and leases.  One thing that Redford had done (although clumsily) was to structure our finances with a distinction between long term infrastructure costs and operating costs.  That's a distinction that matters, and we need to shed this silly "debt is bad" mantra - yesterday.  Long term debt that is used for purchasing infrastructure is not a bad thing.  It never was.

Alberta needs to funnel every dime it gets in resource revenues into the Heritage Savings Trust Fund. Now.  In a couple of decades we can use the investment income off that fund to sustain the entirety of the government (hint:  take a long look at Norway).  In the meantime, let's use all of the instruments of revenue collection available to the government so that we can actually have a reasonable standard of living for the PEOPLE of this province.  

The Corporate Tax Regime In Canada Is Corporate Welfare

... and it is being done at the expense of Canadians.

Corporate Canada Pays Low Taxes But Contributes In Lots Of Other Ways

Consider the following:

PricewaterhouseCoopers did its own analysis — a survey of the Canadian Council of Chief Executives' roughly 150 members. It was voluntary and only 63 replied. But of those who did, the survey found their businesses paid a total of $19 billion in corporate taxes, plus another $5 billion in various other charges and fees to various levels of government.

Okay, that's a voluntary survey, and doesn't give us the entirety of the picture.

The left-leaning advocacy group Canadians for Tax Fairness said they did an analysis of the top 60 companies listed on the Toronto Stock Exchange, and found only four companies paid the full corporate rate. More than half paid less than 10 per cent, and 13 firms paid less than five per cent.

But, let's take a look at how much was transferred out of Canada, shall we?

For example, in 2011, Canadian businesses invested $53.3 billion in Barbados, third only to the United States and the United Kingdom. By some estimates, the Canadian government is losing $80 billion a year in tax revenue due to this kind of profit-shifting.

Do you see anything wrong with this?  I certainly do.  What it boils down to is that the Corporate tax system in Canada has been gutted from the inside not just with a series of rate cuts, but also with a series of bookkeeping games that make it easier for corporations to shuffle money offshore before it appears on the bottom line ledger.  (at least of the "official" set of books that CRA would see if they did an audit.

In response to this blatant tax dodging, we get the following patronizing response:

"Corporate Canada pays governments in lots of other ways. They pay different levels of governments, they pay property taxes and they pay a variety of fees and charges that in many cases actually exceeds what they pay in corporate income tax," said John Manley, head of the Canadian Council of Chief Executives

Oh gosh, they pay property taxes.  You don't say.  So do I ... your point is what?  Oh, and those "fees" you mention - yeah, well, I get hit with those every time I contact the government too.  I pay fees to register my car, my driver's license, on my utility bills for garbage pickup and water/sewer every time I make a transaction with the government in fact.  Don't feed me a sob story about how hard done by you are with "fees" to the government.

"It's not right," Mr. Manley said. "But figuring out how to fix it without unintended consequences requires really smart people, and the Organization for Economic Co-operation and Development has been working at this for a very long time." 

Mr. Manley said the Canadian Council for Chief Executives supports the OECD's efforts, but until the Canadian tax code changes, businesses have every right to take advantage of what the code allows. 

"There is no one in Canada who wouldn't avoid paying a tax if there is a legal way to do it," he said. "It doesn't mean it's wrong to minimize your tax. It just means that governments have to get rules in place and make sure everyone is playing by them."

The issue is that governments have spent the last twenty years downloading the bulk of the tax burden onto middle income earners and telling us that they are "cutting taxes", when all they have been doing is playing to the sociopaths in charge of the large corporations.  It's not small, privately held, corporations that are the problem here - it's the big entities who have the time and resources to invest in figuring out the next way to game the system or lobby the government into opening new loopholes for them to exploit.

Under the Harper Government, we have seen them consistently reduce the tax rates, downloading everything they can from the Federal level to lower levels of government, at the expense of individual Canadians.  Just as we found in Alberta under Ralph Klein, yes the budget appears to be balanced, or even in a surplus position.  Except that there is a growing deficit in other areas - infrastructure, social programs and the like - things which affect individual Canadians far more dramatically.

Lower taxes is a false economy - it does not result in more efficient government, nor does it "encourage investment".  For the last couple of decades, the corporate world has used the "if you tax us too much we'll stop investing here" as a threat.  It's time to call their bluff.  Companies that want Canadian talent will stay here.  Those that leave will open opportunities for Canadian companies to move into.  It's time that we stopped acting afraid of the multinational corporations and told them pay their fair share.

This Is Pretty Much Sacrilege In Alberta

It's about time that someone started to discuss a sales tax.

I've said for years that Alberta's government needs to examine its cash flow realities and adapt to the current situation. For far too long, we've been living in a fiscal lala land where the notion of a sales tax has been taboo - in spite of the reality that just about every other jurisdiction on the continent has one.

Dear ACTRA: Bugger Off

With ACTRA demanding that we start paying taxes to ACTRA for Canadian Content on the Internet.

This is beyond offensive. Not only do these nitwits fail to understand something - there is a huge amount of Canadian Content on the Internet. This blog is CanCon. I'm a Canadian, I write this blog - do the math.

If ACTRA is going to be on the receiving end of levies (as they are for recordable media - even when it is used purely for data!), I'd like to know just how they plan on funneling some of that money to me? It won't, any more than the levy on recording media funnels down the thousands of independent artists that produce below the radar of big corporate interests.

Frankly, I find ACTRA's high-handed demands are unreasonable, and offensive. Whining because I might watch a YouTube video of a program that somebody posted up there is simply stupid. Demanding that Internet users pay some kind of arbitrary levy simply for using the Internet is wrong. Dead wrong.

ACTRA, along with the recording industry, needs to come up with a new business model - and that business model cannot include picking my pocket on the assumption of what I might or might not be doing.

There Are Reasons I Don't Hire An Economist To Do My Accounting

So ... today's Budget Day, and Big Daddy's crew delivered the fantasy trip spending budget that had been hinted at. (I haven't had the time to look very closely at the spending portion of things yet - I'll start to take that apart later, after I've had a few hours to read it and think about it all)

But, it amazes me the logic that the Conservatives are using here. While a federal government budget is two parts prognostication, and one part actual accounting, we have to step back for a moment and wonder a little at the following:

The budget also vows to freeze EI premiums charged to employees and employees for 2009 and 2010, a measure that will cost Ottawa $4.5-billion over the next two years because the rise in claims will create a deficit it must cover.

So ... the government is expecting, and in fact planning on, an increase in expenditures; but it is going to freeze the incoming money stream? Actually, it's more twisted than that - they're going to freeze an income stream that is going to shrink. A ten percent increase in EI claimants isn't just a ten percent increase in the demands on the EI system, it also represents a reduction in the income the government has to work with in the first place.

I find this particularly ironic, since Conservative governments usually claim to be such great fiscal stewards and then they promptly overspend while shackling the government's ability to raise funds. (Remember, the HarperCon$ have been busily spending money like drunken sailors since 2006 - as long as it's for the military, they seem to have no restraint in their spending)

The Cost Of Failing To Plan

Calgary has been notoriously short sighted in its budgeting since the 1990s, and when combined with a provincial government which philosophically objects to spending money of any kind, we find ourselves facing quite a deficit on many different fronts.

The budget for Calgary's next three years contains quite the hike in tax revenues.

Just as the costs of building a new hospital in Calgary have exploded in the ten years since the General Hospital was demolished, the immediate costs of expanding our transit system, and other infrastructure have also increased compared to what they would have been had the city invested in its future needs as it grew.

Calgary's tax payers are about to carry the costs of a style of government that has been terminally myopic for almost two decades. I, for one, am less than impressed with this.

It's Not Ideology?

Horsefeathers:

But Mr. Harper flatly denied any ideological underpinnings, saying the cuts were made through a series of analyses, the bulk of which “the Department [of Canadian Heritage] itself” carried out.

For those who haven't spent time in Ralphberta, home roost for Harper and his band of thieving neoCons, Harper's hostility towards arts funding, equality rights and so on is simply typical extreme neoCon dogma. The attitude is based on a blithe supposition that the 'free market reigns supreme'. To hell with anyone who doesn't have huge bags of money to back them - more or less.

Particularly laughable is this little gem:

“I've always been torn on music and piano in a way because I actually get a great deal of satisfaction out of when I do it, but I get so wrapped up in it. I've always had that problem with the artistic things I've enjoyed doing – I've played piano, I've sung a bit, I used to write poetry – I've always found with these kinds of things that they draw me in and I can't let them go. I find it difficult to do it just on the side, a little bit here and now,” he said.

Don't even try to make yourself look 'warm and fuzzy', Harper - you aren't, and you won't ever be publicly. What this looks like to me is the classic line used by the religious right towards GLBT people - "But I've got friends who are ..." - it's condescending, pretentious and disrespectful to those that you've just kicked in the face.

And it's not just a $45 million dollar cut - because you started hacking at such things back in 2006 when your government went on its lovely little hack-and-slash campaign of $1 BILLION. Which you've subsequently spent goodness knows how many times over on short term leases to conduct your most excellent adventure in junior empire building.

Well, Since The HarperCon$ Are Slashing At Culture...

Before we go taking Michael Coren's latest rant too seriously, we need to chat a little about Stephen Harper's war on culture that he has been quietly waging by slashing government programs.

Of course, this makes the religious right wing pleased as punch - after all, they'd like to think that they are the only arbiters of 'correct culture' that should have a voice.

But, then one has to start thinking about the Churches they hold so dear. They have a unique status in Canada that is at least as costly to taxpayers as the various culture programs the government has had in the past - they are tax-exempt.

If Mr. Harper is so interested in 'culture by economic success', then perhaps he'd like to treat the other cultural industry in Canada by the same rules? (Of course, I know this is never going to happen on PMSH's watch - that would require actual principles, integrity and logical consistency - something he keeps demonstrating significant deficits in)

H/T: The Galloping Beaver, Canadian Cynic.

No Sympathy For Victoria

For decades, Victoria's sewage has been dumped into the ocean slightly offshore - raw and untreated. I'm sure that they must be the last major municipality in Canada which doesn't have a sewage treatment system in place. Even the ever-parsimonious Calgary has invested in sewage treatment - quite aggressively, actually.

Well, it seems that the Provincial Government in B.C. finally got its head around the fact that Victoria wasn't going to do anything on its own, so they ordered the city to take steps.

The cost of the project is now approaching $1.2 Billion, and homeowners are crying the blues about a levy that they will have to shell out to pay for the project:

"I question these figures," said Oak Bay Mayor Chris Causton, addressing the discrepancy between ratepayers in his municipality - who will pay the extra $713 a year - and the rest of the region. "I'm not convinced there's four times the flow coming from Oak Bay."

Mr. Causton said that despite the province's dictate, an environmental impact study hasn't even been done.

"I think there's a lot of residents that need to be convinced."

Too bad. The rest of us have been paying for our civic water and wastewater treatment for decades, pal. Victoria's been hemming and hawing over putting in a sewage treatment system for at least 20 odd years that I know of. Meanwhile, it continues to dump its raw sewage straight into the ocean. Like Calgary in so many ways, there's a huge amount of "NIMBY" happening, and now the price is steeper than a lot of residents are willing to pay. Had Victoria started this process in the 1980s, the basic project would have cost a fraction of the $1.2 Billion being discussed now.

Infrastructure is a "pay me now, or pay me later" proposition. Victoria chose "later", and now is obliged to pay with interest. Calgary went through a similar debacle with the south end of Deerfoot Trail. As new developments came in, developers were permitted to simply install traffic lights at intersection points on Deerfoot - turning a highway into a high speed parking lot. In the last five years, we've replaced all of the traffic lights with interchanges - at a cost several times what it would have cost had those interchanges been put in place when the new developments were being created.

Sewage treatment plants aren't pretty things, and few people ever "see" the benefit they deliver. Consequently, in the very "tourist centric" mindset in Victoria, such infrastructure gets pretty low billing for most people, and very few people understand just how much damage dropping raw sewage from 330,000 people into the ocean year after year really does.

Up to this point, I've been somewhat ambivalent to Victoria's waste water issues. However, when the issue is not that the plant needs to be built, but rather the fact that the residents of the city will have pay for it, just as the rest of us do, I lose what patience I do have. The politics have allowed this issue to languish for decades, and now the pigeons have come home to roost. Suck it up, and get on with the damn job.

Stephen Harper's Bad For Business

If you are a Canadian based business, it seems that Stephen Harper doesn't want you to remain so for much longer. The effects of two key Conservative government decisions are now starting to ripple through the business world.

The first decision to set the stage was a ham-fisted handling of the Income Trust issue. While I philosophically agree with the move itself, it was done in such an abrupt fashion it has left Income Trusts sitting on average around 20% below "fair market value" for the same company if they were still structured as a conventional corporation.

The second decision I commented on was the changes to taxation on interest which essentially oblige Canadian companies to hoard their capital in Canada.

These two policy decisions are making Canadian companies ripe targets for foreign takeover.

Sure enough, in the business news yesterday, two significant announcements popped up:

1. Algoma Steel being bought up by an Indian company.

2. 3 Income Trusts consumed by foreign takeovers:

a) VoxCom bought by UE Waterheaters
b) UE Waterheaters purchased by Alinda Capital Partners
c) Clean Power by Australia's Macquarie Bank

Lest some accuse me of being a hypocrite, complaining about protectionism in one sense, and then demanding it on the other hand - I don't object to foreign buyouts per se - I object to our government setting the stage for a discount auction of Canadian assets by the fiat of bad taxation policy that hamstrings the options that would normally be open to Canadian companies.

Under Harper's rule, the only way a Canadian company can grow onto the international stage is to be purchased by a foreign company - otherwise they are subject to a punitive tax regime when they try to finance expansion abroad.

Budgets and Conservative Pseudo Protectionism

Over coffee this morning, my father asked a question about the changes to the interest deductability rules in the March 19 budget.

I must admit to having not paid much attention to this most recent budget - at least not in the kind of detail to identify and understand the implications of some of the more subtle changes like this. (Yes, I do have a life, and it's been rather busier than would allow me the time to dissect a large piece of legalese in detail - especially when it hasn't caught my immediate interest)

So, I went digging around for some analysis, and found a rather nice article on the subject here, which summarizes the interest deduction rules as follows:

The budget proposes a significant reversal in tax policy in this area. If the budget proposals are enacted, interest expense incurred to acquire shares of a foreign affiliate generally will not be deductible unless and until those shares generate income that is taxed in Canada.

The Notice sets out the details of this proposal. The Notice provides that "interest relating to an investment in a foreign affiliate" (as specifically and quite broadly defined) will generally go into a taxpayer's "disallowed interest pool." Amounts in the pool (which will include both interest and other borrowing costs) will be deductible only to the extent the taxpayer recognizes taxable income from shares or debt of the foreign affiliate or net taxable capital gains from disposing of shares or debt of the foreign affiliate. The determination of such taxable income will be made only after deducting (x) any deductions relating to the receipt of dividends from such foreign affiliate, (y) deductions available where a dividend is paid out of previously taxed "foreign accrual property income" (FAPI), and (z) deductions relating to foreign accrual taxes on previously taxed FAPI. In effect, this means that such interest expense can only be deducted to the extent the taxpayer realizes income from the foreign affiliate that is taxed in Canada (or sheltered by other losses or deductions).

It would appear that the "disallowed interest pool" is defined for each particular foreign affiliate of a taxpayer. The Notice contains no provisions for carryover of such amounts to successors in the case of mergers, amalgamations or similar transactions. However, it is understood that the Department of Finance will include appropriate continuity rules in the definitive legislation enacting these provisions.

The Notice provides for a specific anti-avoidance rule by defining "interest relating to an investment in a foreign affiliate" to include interest or borrowing costs that may reasonably be considered to be in connection with a transaction or series "a main purpose of which was to avoid the application" of these rules.

Along with some other changes that the Blake article points out, this starts to look like the Conservatives are implementing a bizarre, and somewhat incomprehensible version of the kind of protectionism that the United States Republicans have so often pushed in legislation (all the while talking about reducing government and "open markets").

This looks a little like an attempt to "keep capital investment at home", but it creates a unique problem for Canadian companies. Canada is a fairly small market overall, which means that a company that is growing significantly is going to have to "go abroad" sooner or later in order to continue growing. By constraining this ability as significantly as the Conservatives are, there is a very real danger of inverting the problem, and finding that Canadian companies will become takeover targets themselves - hamstrung by legal and taxation environments that would make it difficult for Canadian companies to remain Canadian.

There is a perverse irony to this, since we have a party who talks gamely about "open markets" and their supremacy and is in fact not only bungling their attempts to be protectionist (in the model of the Republicans they so admire), but worse will turn Canada's economy into one controlled not by Canadian interests, but by foreign ownership. (Anyone skeptical of this needs look no further than the gradual incursion of Kinder Morgan Inc. into the Canadian resource industries in a way that echoes of some attempts by Enron to manipulate our energy markets)