The new NAFTA deal—now called USMCA—will no doubt make positive contributions to the Canadian economy and investors will appreciate the improvement in market uncertainty. But, there are also some points of concern, including impacts to specific sectors and looming interest rate hikes. Plus, a duty-free limit increase that improves ease of holiday shopping, but could have economic repercussions.
Even with a new North American trade deal in place, we are not out of the woods. The news isn’t all positive, especially for the auto and dairy sectors. The duty-free limit increase is favourable for cross-border online shoppers, but it too could have an impact on the economy; specifically, Canadian retailers. Financial planning strategies to alleviate the impact to those most affected will be required of advisors.
USMCA and Duty-Free Shopping. The de minimis threshold, which determines when taxes (GST/HST) and other duties are applied to shipments from another country has been set at $20 in Canada since 1985. Now, the limit for duties has been increased to $150, though taxes will still be applied to express shipments valued at an also increased $40 or more. This has value both financially, and from an efficiency perspective for Canadians shopping online this holiday season, as shipments below this threshold will likely clear customs faster. The downside is that this might encourage more Canadians to shop online from U.S. retailers, rather than locally. The result: job loss, and reduced tax revenue for the government if businesses are forced to close.
The questions to be discussed: if Canadian retailers close, what financial support options are in place when job loss occurs, particularly for the younger demographic that depends on retail positions to build job experience? Are Canadian families prepared for this outcome?
USMCA and the Canadian dairy industry. Dairy imports into Canada were covered by the trade agreement, and there may be negative consequences to the Canadian agricultural industry. The previous deal imposed high tariffs on the United States for exceeding import limits. These quotas have now been increased, and Canada is scrapping Class 7 pricing on dairy, and now has to abide by U.S. pricing for specific dairy products. While the specific toll this will take on Canada’s agricultural industry remains unclear, the industry is concerned about the repercussions.
The questions to be discussed: Will Canadian dairy farming revenues fluctuate in 2019? How will this affect tax instalment payments? Will there be job losses or income reductions in these families? Why does that matter in particular at a time when CPP and other tax hikes continue?
USMCA and the automotive industry. The issues affecting the automotive industry were also addressed, and the news is both good and bad. The aluminum and steel tariffs imposed by the U.S. earlier this year have still yet to be rescinded through this new trade agreement, and it’s not anticipated that this will occur. The good news: USMCA does require a greater quota of auto parts to be manufactured in North America, by workers who must make at least $16 per hour. A side letter accompanying the agreement was also drafted to exempt Canada and Mexico from U.S. auto tariffs imposed in the future. This would protect Canada from Trump’s threat to set auto import tariffs to 25 percent.
Questions to be considered: Will some auto workers be receiving severance packages in anticipation of higher costs to companies? What is the best way to negotiate an exit from employment with the right after-tax results?
The impact on interest rates. With this agreement ready for signing, and Prime Minster Trudeau’s reassurance that this deal will prove to be a good move in strengthening the economy, the stage has been set for further interest rate increases from the Bank of Canada.
Uncertainty about NAFTA might have kept the next interest rate increase at bay, but now it’s widely believed that on October 24 Stephen Poloz will announce another rate hike—and possibly a larger one than previously forecasted. Three more increases are also expected in 2019. Plus, confidence in the economy has clearly surged following the news that USMCA is a go, which caused the Canadian dollar to strengthen on Monday.
Questions to be discussed: What debt management plans have been put in place for your clients in the face of impending interest rate hikes? Will a higher Canadian dollar make it easier to travel and less costly to fund retirement homes down south? Will more money be available for new investments as a result?
How advisors can help. What this means across the board is that advisors need to explain to clients how the new USMCA trade deal can affect them financially, and help them hedge against current and future economic uncertainty. A prudent course of action includes year-end tax planning that incorporates debt management, a review of gaps or rebalancing needed in investment portfolios, and a renewed plan for tax-efficient investing. Advisors should make these conversations and reviews a priority with clients before year-end.
Additional educational resources: Prepare to help your clients better address and adapt to the tax, financial and investment standards required in a constantly changing, uncertain world. These issues will be discussed at the CE Summits November 2 – 7. Register by October 15 for the best tuition fees. Or study in the convenience of home or office: enroll in the Real Wealth Manager Program.
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