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August 21, 2017

Tax Reforms Will Have Impact On Business Owners

Proposed changes to the Income Tax Act (Canada) could be one of the most significant reforms to Canada’s tax system for business income in decades – and will significantly impact tax planning for all business owners, says an article at the Private Wealth Canada website by Carolle Fernando, associate, and Eric Feunekes, articled clerk, at McInnes Cooper. ‘Proposed Changes To Business Income Tax Rules: A Gamechanger For Private Business Owners’ says the proposed changes target three key areas the government perceives as abusive: income sprinkling ‒ the practice of splitting income within families to minimize the overall income tax payable; capital gains stripping – the conversion of after-tax corporate earnings into capital gains resulting in a reduced rate of applicable tax; and tax deferral ‒ the holding of an investment portfolio inside a private corporation that, due to overall lower corporate tax rates as compared to personal tax rates, currently results in a financial advantage for owners of private corporations engaged in active business. With the proposed changes starting to take effect as early as January 2018, the paper says business owners are well-advised to start now to determine how the new rules will impact their business structure, the planning steps they should take, and opportunities for restructuring. The federal government has released a consultation paper, ‘Tax Planning Using Private Corporations,’ which closes for comment on October 2.

Accountants Remain Optimistic About Economy

Optimism about the Canadian economy is up substantially among professional accountants in leadership positions, but U.S. trade protectionism is the top challenge, says a survey by the Chartered Professional Accountants of Canada (CPA Canada). The second quarter ‘CPA Canada Business Monitor’ polled more than 500 business leaders with half (50 per cent) reporting they are optimistic about the prospects of the Canadian economy over the next 12 months. That is up from 38 per cent in the first quarter of 2017 and more than double the 21 per cent who reported feeling optimistic in the same quarter a year earlier. Protectionist trade sentiments in the U.S. tops the list of challenges facing the Canadian economy cited by 23 per cent of the respondents, with oil prices close behind referenced by 19 per cent. “Canadian business leaders are wary but are not being paralyzed by possible risks,” says Joy Thomas, president and CEO, CPA Canada. “The significant increase in optimism is a reflection of Canada's economic resilience, especially with continued uncertainty in the United States.”

Passive Funds Pose Threat To Green Bonds

Passive funds and concentration risk pose threats to the development of actively managed green bond funds, says Fitch Ratings. Next year could be a pivotal one for the green bond sector as a number of funds launched in 2015 will reach a three-year track record, a milestone for many fund selectors. And while green bond issuance increased “dramatically” last year, it says the market was still small and there were a limited number of issuers ‒ around 100 compared with 3,000 issuers in broader market indices. The investable universe could end up being even smaller if funds apply additional exclusion criteria, thereby increasing concentration risks. It also raises the prospect of passive funds “cannibalizing” active products, as has happened in broader markets.

Risks Not Zero With Japanese Equities

While Japanese equity market might be offering good opportunities at present, risks are not zero, says a Unigestion report. As a result, ‘Japanese Equities: benefiting from the domestic economic recovery’ believes investors should adopt a risk-managed approach to Japanese equities to mitigate the effects of any possible shocks. Some of the shorter- and longer-term risks that could affect the asset class include the risk of U.S. protectionism. Any protectionist measures the Trump administration implements could have a negative impact on Japanese exporters. That said, the recent free trade agreement between Japan and the EU should provide a boost to exporters, it says. Exporters also face the risk of a potential slowdown in China. The Chinese economy currently seems reasonably stable, but it is weighed down by a significant private sector debt and a fading fiscal stimulus effect. Should the Chinese economy falter, Japanese exporters might suffer. A broader risk is public debt. Abenomics has generated high government debt and a large primary deficit. The Abe administration has pledged to turn the deficit into a surplus by fiscal year 2020, but that seems optimistic, says the report.

Indices Decrease In July

Thirty-four of the 44 Morningstar Canada Fund Indices decreased in July. Losses in most cases were limited to two per cent or less. However, nine of the 10 fund indices with positive results were up by less than two per cent. The best-performing fund index for the month was the one that tracks the greater China equity category, which increased 3.5 per cent. Funds in this category have been the top performers in Canada so far in 2017, with an aggregate increase of 21.2 per cent since the start of the year. Natural resources and energy have been the worst performers for the year-to-date, with their respective fund indices decreasing 11 per cent and 19.6 per cent.

Smart Beta ETFs Reach Record High

Assets invested in smart beta equity ETFs/ETPs listed globally reached a new record of US$592 billion at the end of the first half of 2017, says ETFGI’s June 2017 global smart beta equity ETF and ETP industry insights report. It shows 89 per cent of smart beta assets are invested in the 617 ETFs/ETPs that are domiciled and listed in the United States and 76 per cent of the assets are invested in smart beta ETFs/ETPs that provide exposure to the U.S. market.

BMO Investments Launches Funds

BMO Investments Inc. (BMOII) has launched two funds designed to help Canadian investors diversify sector exposures and offset Canadian market concentration by adding international exposure to their portfolios. The BMO International Equity Fund provides exposure to international equity markets, which are expected to continue to rebound based on accommodative monetary policy and lessening political risks. International economies are more diversified by sector and have limited exposure to resource companies compared to Canada. The BMO Japan Fund provides access to Japanese equity markets, which are expected to benefit from stronger export-stimulated economic growth. The Japanese economy has more exposure to industrial and consumer companies and has limited exposure to resource companies compared to Canada.

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July 31, 2017

IMF Upgrades Canada

The International Monetary Forum (IMF) has upgraded its growth forecast for Canada this year, but downgraded it slightly for 2018. Its ‘World Economic Outlook Update for July’ upgraded Canada’s growth for 2017 by 0.6 percentage points to 2.5 per cent; but revised the 2018 forecast downward by 0.1 percentage points to 1.9 per cent. Global growth is set for 3.5 per cent this year and 3.6 per cent in 2018, but the outlooks for the U.S. and UK were both downgraded amid concerns over fiscal policy and economic activity. The IMF projected U.S. growth for 2017 to be 2.1 per cent, down from 2.3 per cent; and said 2018 would see 2.1 per cent growth, down from the 2.5 per cent forecast in April as it says near-term U.S. fiscal policy looks less likely to be expansionary now than it believed would be the case in the spring. However, the 2.1 per cent growth pace is still well above the lacklustre 2016 U.S. outcome, which was 1.6 per cent.

Performance Of Economy Surprising

Perhaps the most surprising thing so far in 2017 has been the strong performance of the Canadian economy and, as a result, the Canadian dollar, says a Leon Frazer ‘Quarterly Review.’ The Canadian economy has grown at roughly twice the rate of the U.S. and has added jobs in a similarly impressive fashion over the last six months. It sees far more positives than negatives when looking at the current state of the Canadian economy. “While it’s true that elevated Canadian consumer leverage has fueled some of the growth in both the housing market and the general economy, it is not enough to create the kind of statistics we have seen so far this year. Employment is the key to keeping credit issues in check and recent job growth has been broad when measured both by industry and geography,” says the Review. Interestingly, the Canadian equity market has yet to react to the increasingly positive fundamental backdrop this year. The Canadian equity market has lagged both the U.S. and most international equity markets after a standout year in 2016. Barring some form of economic shock, longer-term interest rates should resume their upward movement from last summer, benefitting commodity prices and financial institutions.

European Confidence Falls

European investor confidence fell while confidence among North American investors surged this month, says the State Street ‘Global Investor Confidence Index’ which rose to 108.9 points in July, above the break-even point of 100 when risk appetite is neutral. The fall in European investor confidence was explained as related to a dovish tone by the European Central Bank (ECB). However, the seven-point rise from June was driven by a 10-point increase in North America, with European confidence providing a drag. The Europe index fell 4.3 points to 94.2. Ken Froot, of State Street Associates, says “With fading political headwinds and a strong tone to the Eurozone corporate earnings data, the ECB’s dovishness came as a surprise. As a result, European market participants continued to express caution.” He added lower confidence among Asian investors could have been related to the build-up of corporate debt in China and concerns about the Trump administration’s global trade policies.

Canada Can Meet Infrastructure Needs

Canada is expected to see a 61 per cent rise in GDP by 2040 and if it maintains current trends in investment, it is forecast to meet 98 per cent of the investment needed for its infrastructure to keep pace, says the G20’s Global Infrastructure Hub (GI Hub). The report, ‘Global Infrastructure Outlook,’ reveals the cost of providing infrastructure to support global economic growth and to start to close infrastructure gaps forecast to reach US$94 trillion by 2040, with a further $3.5 trillion needed to meet the UN Sustainable Development Goals (SDGs) for universal household access to drinking water and electricity by 2030, bringing the total to $97 trillion. In Canada, the sectors with the largest funding shortfalls are rail (17.3 per cent or $7.1 billion), telecommunications (8.1 per cent or $5.7 billion), and airports (7.8 per cent or $4.6 billion). The smallest funding shortfalls in Canada will be the road and water sectors, which will each meet more than 99 per cent of expected infrastructure funding needs by 2040. Globally, $3.8 trillion will need to be invested in infrastructure every year to meet demands, the equivalent of the total annual GDP of Germany, the world’s fourth largest economy, it says. The United States will have the largest gap in infrastructure spending, at $3.8 trillion, while China will have the greatest demand, at $28 trillion, representing 30 per cent of global infrastructure investment needs.

Managers Pessimistic On Credit Conditions

Credit portfolio managers are more pessimistic on credit conditions in North America over the next 12 months, says a survey from the International Association of Credit Portfolio Managers. Its ‘Credit Default Outlook’ index for North America for the next 12 months is -41.2, down from 20 in the previous quarter’s 12-month survey. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve. In North America, the drop in sentiment looks ominous, but defaults are currently at a low level and North America is in a different situation than Europe. Europe is still in the quantitative-easing part of the cycle which has ended in North America. It found 53 per cent of respondents think defaults will remain at the same level in North America, while 44 per cent expect them to rise and just three per cent think defaults will decrease. Commercial real estate is one sector that worries survey respondents in North America, with almost two-thirds of respondents predicting that defaults will increase over the next 12 months due to structural changes in the retail sector.

ETF/ETP Assets Reach New Record

Assets invested in ETFs/ETPs listed globally reached a new record of US$4.168 trillion at the end of first half of 2017, says ETFGI’s June 2017 global ETF and ETP industry insights report. ETFs and ETPs listed globally gathered a record amount of US$63.57 billion in net inflows in June and a record level of US$347.7 billion in year-to-date net inflows. At this point last year, there were net inflows of just US$123.55 billion. Equity ETFs/ETPs gathered a record level of US$41.15 billion in net inflows in June, bringing year-to-date net inflows to a level of US$242.69 billion, which is much greater than the net inflows of US$15.81 billion over the same period last year. Fixed income ETFs and ETPs have gathered a record level of US$17.17 billion in net inflows in June, growing year-to-date net inflows to a record level of US$80.96 billion, which is greater than the same period last year which saw net inflows of US$67.98 billion. The global ETF/ETP industry had 6,965 ETFs/ETPs, with 13,125 listings, assets of US$4.168 trillion, from 328 providers listed on 70 exchanges in 56 countries, it says.

Green Bond Market Enjoys Growth

The green bond market continues to enjoy strong global growth among investors and issuers, says J.P. Morgan Chase & Co. Green bond issuance was $87.7 billion in 2016, up from $500 million in 2012, when the first green bond came to market. So far this year, green bond sales are approaching $50 billion. Green bonds are aimed at attracting investors who are not only looking for returns, but also protecting the environment. However, investor interest is extending into other socially prominent areas with bonds aimed at financing low income housing, educational opportunities for youth and women-owned business.

Venture Financing Declines

Venture financing in Canada declined by 14 per cent year-over-year in the first half of 2017, says a report from PricewaterhouseCoopers LLP (PwC) and CB Insights. It says venture-backed investments declined to $885 million in the first half this year from $1.03 billion in the first half last year. In addition, the number of deals declined, dropping by 25 per cent to 127 in the first six months of 2017 from 170 in the corresponding period in 2016. Financing activity was also down, the second consecutive quarterly drop. There was $400 million in venture financing in the quarter, spread across 58 deals. In the same quarter last year, there were also 58 deals, but the overall value was $600 million.

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