Accessible policy focused perspectives

Pipeline policy, power and Politics


The provincial government has announced a temporary moratorium on any additional oil tankers carrying certain petroleum products on B.C.’s south coast. The ban is not permanent and is part of a larger environmental and disaster review process. In his quotes on the review John Horgan has made it clear that these policies are an attempt to stop the construction of the Kinder Morgan pipeline repeatedly saying this is the representation of the “will of British Columbians”.
While there are currently some tankers coming in and out of the Burrard inlet, the NDP have posited that the construction of the Kinder Morgan pipeline would increase this traffic sevenfold. This number seems to be consistent across all reports. This is because the majority of the current supply is used locally in BC and Washington which leaves a rather small percentage to be transported overseas. By tripling the bitumen coming in and exporting nearly all the new fuel, tanker traffic would shift from an average of 5 tankers a month to an estimated 34. Traffic of this volume increases the likelihood of a spill at least proportionally if not more as these ships maneuver around each other and a busier waterway.
At present date the ban would only be on any additional tanker traffic. This does not explicitly prevent the pipeline from being built but building a pipeline without being able to ship product through it is not exactly a good business venture. The venture would also block any additional rail traffic. This is important as restricting pipeline transportation but allowing the increased transportation of rail (a more dangerous form of transportation) is effectively bad economic and environmental policy simultaneously. The ban will be put in place until an independent review panel can say that a spill off the coast of Vancouver would be effectively cleaned up. Speculatively, this seems to be intentionally unattainable criteria as the guideline is both vague in language and ambitious as a standard.
The policy will almost certainly be challenged in courts. The Constitution gives the Federal Government the responsibility of regulating trade and commerce as well as navigation and shipping. It is plausible that these constitution responsibilities grant the federal government the right to  permit the construction of the pipeline and the export of oil sands through B.C., without requiring the consent of the provincial government. The provincial government does have the right to regulate all non-renewable resources and energy projects which, given the potential harm to wildlife and waterways, are at least grounds to be heard in court.
While the ban may not hold up, court hearings take time, more time spent in uncertainty undermines the confidence investors may have in an already risky pipeline venture. Environmental regulations continue to be ramped up both locally and globally, which makes return on investment less and less certain. More than an outright ban from the NDP it is a signaling that they are going to do everything within their power to block the pipeline, and that signaling alone may be enough to dissuade Kinder Morgan from the estimated $7.4 billion required to build their pipeline.
Trudeau and Alberta leader Rachel Notley have stated assuredly and repeatedly that the pipeline will be built as a signaling to investors that this is in fact a viable project. It seems very unlikely that either Alberta or Canada will have a government that opposes the project anytime soon. With Horgan’s grasp on provincial leadership being at such a slim margin such strong anti-pipeline signaling may not have the policy weight it requires should this legislation fail to hold up in court.
While the federal government has final verdict on matters of national interest, a category Trudeau asserts that the pipeline falls under, there is also the matter of a brewing trade embargo between provinces which the Prime Minister will now need to navigate. While the banning of B.C. wine in Alberta has become somewhat of a joke recently the economic impacts of refusing trade between the two Provinces could have an extremely negative impact on the nation as a whole. Already Alberta has stated that it will not buy B.C. hydroelectric power without the pipeline, this would further degrade our already small chances of achieving our climate targets. Additionally in 2014 B.C. sent $13 billion worth of goods to Alberta and received over $15 billion in return. Without this trade relationship both provinces stand to lose substantial gainful employment and economic activity. It is unlikely to go this far but the economic retaliations of Alberta towards B.C. are the signs of divergent interests that will need to be managed carefully to avoid additional, mutually detrimental, behavior.

Eliminating the tax Loopholes


The Liberal Government has proposed a number of changes to income tax loopholes. The discussion of the impacts of these tax cuts has been widely disputed. Prior to deciding whether or not they are beneficial, it is important to clarify what they are and what their intent may be. The overall plan breaks down into 2 parts. The first consists of closing loopholes in the current tax code such as income sprinkling, capital gains and passive investment income. The second component is simply a reduction in the corporate tax rate from 10.5% to 9%.
Let's start by breaking down the tax loopholes, looking at how they are used and how much of an impact they have on businesses:
Income Sprinkling:
 Let’s say I run a business that had an annual income of $150,000 dollars in 2017. If I claim this income, before deductions, I can expect to pay $28,977.25 in income taxes, an effective rate of 19.3%. Now let's say rather than simply claiming all this income as my own, I pay my 2 children one third of the total income and we each claim $50,000. Each of us would pay $6,567.50, which brings the total income tax charged to $19,702.50, an effective tax rate of 13.1%. Despite my children not working for the business I can claim that they are, split the money in such a way that allows me to avoid seeing higher tax brackets and save $9,274.75. This, in a nutshell, is income sprinkling. I take advantage of the fact that lower earners pay lower income tax rates by counting multiple small incomes and thus never hitting the tax hike that occurs once I cross the $75,900 threshold where the rate jumps from 15% to 25%.
Passive Investment Income:
Put simply, passive investment income is the act of leaving all revenues not needed for living expenses inside the incorporated company and investing them in stocks and bonds within the company. Since these funds are not paid directly to an individual they are not counted as income tax and thus fall under the low corporate tax rate of 10.5%. While the money is still technically held in the business there is no intention of re-investment into business and the funds are well above what would be considered a necessary safety net.
Capital Gains:
Capital gains are things that grow in value over time (land, shares of a business etc.). When you choose to sell these goods you will be taxed on the income from them. Canada has one of the lowest Capital gains taxes in the world. You are taxed at your top income bracket but only on 50% of the earned value. So if I sell some land, or shares in a business for $200,000 that I originally paid $100,000 for. In B.C., I would be taxed on 50% of the $100,000 I earned at 19.51%; which means I would pay $9,755.00,  which is only 9.8% of the $100,000 profit. Businesses take advantage of this by transferring income through holding companies and ultimately claiming it as capital gains which, rather than being taxed in the 25-28% through income tax they pay just under 10%.
The intention of taxation is for individuals to pay a fair amount based on their income. There has been a great deal of pushback on closing these loopholes from various beneficiaries because it will mean increased taxation for individuals. The Liberals argue that these changes will only have large effects on those earning over $150,000 annually. This mostly seems to be the case, as all three given scenarios show significantly more money being saved as more dollars are earned. Especially capital gains, as it requires multiple complex, costly steps.
There are some reservations about how to solve a loophole such as income sprinkling. Proving a family member is working for the business can be a difficult task to accomplish, and assessing what a “fair wage” might be so to avoid overpayment for tax reasons isn’t exactly easy. The Liberal Government has not come forth with the details of how this will be monitored and it is possible that it becomes a bureaucratic headache.
While it is understandable that those who will be hurt by the closing of these loopholes oppose their installation, it is important to bare in mind that these taxes exist for an intended reason. If tax breaks are being used for personal benefit outside of their intention, it is a flaw of the system rather than an intended benefit. While it is difficult to blame any individual for working to reduce their tax rate, it is also understood that closing loopholes so taxes will have their intended effects is part of the expected responsibility of our government.
It is also important to mention that the Liberal Party has announced the intention to reduce the corporate tax rate from 10.5% to 9% for the first $500,000. When combined with provincial rates, average total rate of 12.9%, we would still have a corporate tax rate well below other competitive nations such as the U.K. (19%), Italy (27.8%), Japan (21.4%), Germany (30.2%), France (15%) and the U.S. (19.8%).  The government estimates that this will lead to 2.9 billion in savings for small businesses over the next 5 years. Estimates on how much closing the loopholes will save vary widely but the numbers are much larger from 6 to 16 billion annually. Much of these costs will be felt by the top 10% rather than the middle class and/or small businesses but it is difficult to tell if, on average, small businesses are receiving a tax break. At a 12.9% taxation rate the discussion of whether they need one should also be had.

What Raising the National Interest rate really means

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The bank of Canada announced that it will raise its interest rate to 1.25 percent. This is the third raise that has taken place since the record low last summer. While there are some clear effects of this decision there is also a great deal of uncertainty on the international level as the North American Free Trade Agreement (NAFTA) hangs in the balance.
Firstly the how. Governments do not offer loans directly from the bank of Canada to individuals. Instead the Bank of Canada lends money out to the banks we deal with (TD,RBC, Scotia etc.). So when a national bank increases its interest rate the banks tend to borrow less. When they borrow less they have less to lend and so they demand higher returns on that which they are lending. This is why a move from 1% to 1.25% by the National Bank means a move from 3% to 3.25% from all of the public banks.
Banks raising their interest rates mean a few things on the housing front: First is that the maximum amount the banks will be willing to lend you will drop; the second is that more of your monthly mortgage payments will be going to interest instead of the principle. It is not all bad news though, this reduction in willingness to buy means a reduction in the competition for housing which will cool the housing market. For people trying to enter the booming market this may mean that there is opportunity. Though it is difficult to specify how much the housing market will drop from this raise, it is clear that the two previous hikes in interest rates have created the beginning of a downturn in housing costs at the top end of the market.
Raising interest rates also means that there is more earning potential in saving money. Banks seeing better returns on their investments means people seeing better returns on their saving accounts. This trend is generally met with individuals spending less money and saving more. This reduction in spending means a reduction in GDP (Gross Domestic Product). The relationship of these financial metrics are unimportant to everyday citizens, what is important to know is that the inflation rate lowering means that the relative price of what we produce will grow slower that the price of what other nations produce. As this occurs Canadian goods will become more viable internationally, which means a higher demand for our exports and, in turn, a higher demand for Canadian dollars to purchase our exports. An increase in demand for Canadian money means an increase in strength of our dollar. For those who have vacations planned or routinely go shopping in the states this is good news.
The subject of trade is where things become a little murky. Traditionally strengthening our dollar makes imports more valuable and exports less so. This is bad news for industries which rely heavily on exporting their goods such as oil and gas. It is also good news for jobs in manufacturing and technology as they rely heavily on importing raw materials from outside of Canada. These facts are traditionally pretty consistent, the variable we see today which we have not had for a long time is the volatility of the free trade agreement with our biggest trade partner: the United States. While speculating on what the outcomes of free trade negotiations are with a government that seems to lack a cohesive direction is impossible the truth is that our relationship on trade is weaker than it has been in a long time. Should any future trade agreement involve things like tariffs for entry to the US we would effectively lose our largest and most accessible trading partner. The implications of this would be of greater concern than any control metric that our government can effectively employ.
For now the decision to raise the interest rate means less lending, more saving, a stronger dollar and in increased desire to import vs. export. We are still on the very low end of interest rates and this decision will have effects on the margins but nothing jarring or alarming. Whatever decisions occur on NAFTA will be of a greater impact than the federal monetary policy can manipulate.