Risks may threaten economy
Some of the 116 giant turbines are seen off the coast of Sussex on Wednesday in Brighton, England. The last of 116 wind turbines have been installed at the Rampion Offshore Wind Farm. The project is being built by E.ON, the UK Green Investment Bank plc an
Canada’s economy will grow at a faster clip than expected in 2017, a new report says, but an overheated housing market threatens to bulldoze optimism over rosy economic data in recent quarters.
In its interim economic outlook released Wednesday, the Organization for Economic Co-operation and Development raised its estimate for Canadian economic growth in 2017 to 3.2 per cent, up from its earlier estimate of 2.8 per cent — the fastest growing economy among G7 countries this year. It left its 2018 estimate unchanged at 2.3 per cent. The report mirrors earlier studies, including from the International Monetary Fund, that suggest Canada is set to beat its developed economy peers this year.
However, the OECD report also points to looming vulnerability in the Canadian housing market that could cause growth to shrink faster than expected in the second half of 2017. Rising housing prices and swelling household debt levels in Canada runs the risk of leading to a market correction that would reverberate throughout the economy, the report warned.
“A sufficiently large shock could even threaten financial stability,” it said.
The OECD report expects rising interest rates to temper the overheated housing market in some of Canada’s largest cities. Bullish economic data in the first half of 2017 prompted the Bank of Canada to raise its overnight interest rate twice in less than two months, up to one per cent.
“Raising interest rates will reduce overheating in housing markets, which poses economic and financial stability risks and has made housing increasingly unaffordable, especially in Toronto and Vancouver,” the report said.
A new poll of small business owners suggests their views about the proposed tax changes are less hostile than the political debate would have many believe — but the potential change to passive investment income provokes the most concern, with 55 per cent calling it unfair and 42 per cent saying it will hurt their business.
Meanwhile, a large majority (63 per cent) say the proposed income sprinkling changes would have no impact on their business. Even so, 44 per cent say it’s an unfair change.
The proposed tax reforms, unveiled this summer, have sparked a firestorm of opposition from business lobby groups and Conservative MPs. Prime Minister Justin Trudeau insists the proposals would simply stop the wealthy from getting unfair tax breaks by diverting money through private corporations, but opponents argue there are unintended impacts that will hit all small business owners, wealthy or not.
The Angus Reid Institute’s poll of 852 small business owners shows a more nuanced reaction. Overall, most of them think the proposed changes are unfair, but they are much more open to the crackdown on income sprinkling than they are on passive income.
“Small business owners do not react in a monolithic way to the amendments,” Angus Reid said in a news release, adding that the divide in views is “driven largely by the size of their own ventures, and the amount of risk their businesses are carrying.”
Income sprinkling generally involves naming family members as shareholders and then splitting income among them to avoid higher tax brackets.
The government is proposing a “reasonableness test” to ensure the family members are legitimately earning the income through involvement in the business (this test currently exists for paying salary to family members, but not dividends).
The poll shows 44 per cent of small business owners think the income sprinkling proposal is unfair, while 36 per cent think it’s fair and 20 per cent weren’t sure. Sixty-three per cent of owners say the income sprinkling change would have no impact on their business, while 24 per cent say it would have a negative impact.
Meanwhile, when it comes to the proposed change to passive investment income, 55 per cent of the small business owners feel it’s unfair, and just 22 per cent say it’s fair. Twenty-three per cent were not sure.
The government is proposing to remove the initial advantage a small-business owner has in starting an investment portfolio inside their company, rather than outside of it.
Because small business income is taxed at 15 per cent, a small-business owner has more to invest if they keep the income inside the corporation rather than draw it out, where it would be taxed at much higher personal rates.
Trudeau’s Liberals haven’t decided exactly how to reform this, but they’re essentially planning to add on more taxes to passive investment income when it is withdrawn from the company in order to eliminate the initial savings.
Small business owners are evenly divided on the impact of this proposal, with 42 per cent saying it would hurt their business and 43 per cent saying it would have no impact.
Overall, entrepreneurs with five or more employees tended to be more likely to oppose the changes than those with fewer.
The poll also shows a significant divide depending on the political views of the business owner. Past Conservative voters were about twice as likely to oppose the changes as past Liberal voters.
The poll also surveyed 1,139 non-entrepreneurs, who were evenly split about whether the proposed changes were fair.
But 54 per cent of them said professionals who incorporate (as is common among doctors, dentists, lawyers, and others) shouldn’t gain access to the same tax advantages as other small businesses. Among small business owners, that view drops to 41 per cent.
The survey was conducted between Sept. 13 and 18 among members of the Angus Reid Forum and Angus Reid Business Forum. A probability sample of business owners of this size would have a margin of error of 3.4 percentage points.
Small-business owners do not react in a monolithic way to the amendments.