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Silicon Valley Bank’s collapse rattled the U.S. Now, Canada braces for aftershocks
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The swift collapse of Silicon Valley Bank (SVB) has sent aftershocks through the global financial system and Canada is not immune from the impacts.
The Toronto-based branch of the startup-focused financial institution was temporarily seized by Canada’s banking regulator on Sunday night as Finance Minister Chrystia Freeland echoed her American counterparts in calling for calm in the face of market uncertainty and fears of contagion spreading to banks north of the border.
Experts who spoke to Global News on Monday said that most Canadians can be confident in the country’s banking system, but fallout from SVB’s collapse could be more substantial in some parts of the economy.
Here’s what to know.
Are Canadian banks vulnerable?
U.S. regulators were forced on Friday to urgently close California-based SVB after billions of dollars were withdrawn by fearful depositors, leading to a run on the bank. Silvergate Capital, which was known for its cryptocurrency-friendly operations, also shut down voluntarily late last week and Sunday saw U.S. regulators move to close New York-based Signature Bank.
Shares of U.S. regional banks slumped on Monday, led by sharp losses in First Republic Bank, spurring fears it could be next if a “contagion” emerges — the term referring to spreading instability through the financial system.
John Ruffolo, a Canadian venture capitalist with 30 years of experience in the technology industry, says the speed at which SVB went from normal operations to completely wrapped up was “shocking.”
“I am absolutely shocked at the swiftness of how the entire fiasco unfolded,” the founder and managing partner of Mavericks Private Equity told Global News on Monday.
Ruffolo says the weekend was “quite stressful” for many in tech, including himself, who were unsure how SVB’s operations would be wrapped up. Many customers in the U.S. were unsure if they’d get access to their deposits when banks opened again on Monday.
If SVB’s corporate and individual clients weren’t allowed to access their funds, Ruffolo said that would drive up the risks of contagion.
It was a major relief then, when U.S. Secretary of the Treasury Janet Yellen came out Sunday on CBS’s ‘Face the Nation’ to assure customers that they would be made whole after SVB’s assets were seized, he says.
“I was able to put my defibrillator away,” Ruffolo says, adding he was “very pleased” with the quick response from the Canadian federal government as well.
The Office of the Superintendent of Financial Institutions (OSFI) on Sunday night temporarily seized SVB’s operations in Canada.
In a statement, OSFI said the lender’s Toronto branch has been primarily lending to corporate clients, and that the branch does not hold any commercial or individual deposits in Canada.
Freeland said in a statement on Sunday night that she had spoken with Canadian financial sector leaders and the Bank of Canada, and that the country’s “well-regulated banking system is sound and resilient.”
Ruffolo agrees that at this juncture, it appears the risk of contagion in Canada is limited.
“From a Canadian impact perspective, unlike in the U.S., I would put the level of the impact at very low,” he said.
Money held in Canadians’ bank accounts is largely protected by the Canada Deposit Insurance Corporation (CDIC). The agency insures up to $100,000 of Canadians’ deposits at 86 member institutions in eight categories, for a possible total of $800,000 in coverage.
A CDIC spokesperson told Global News on Monday in an emailed statement that in over 55 years, “no one has ever lost a dollar protected by CDIC.”
What about the tech sector?
While most Canadians didn’t have much direct exposure to SVB, experts say the collapsed bank’s concentration in startups and the tech industry reveal vulnerabilities the sector will have to grapple with for months to come.
SVB was a “really important player in the startup ecosystem,” says Ray Newal, CEO of C100, a global community of tech investors and entrepreneurs.
“Regardless of your role in the tech community, it was a tough weekend. It was a very sobering moment for tech,” he tells Global News.
SVB was a “foundational partner” for C100 and would sponsor the group’s events in Canada, Newal says.
In addition to bringing together the community at events, he says SVB would play a pivotal role in providing reliable banking, investment and loans to many startups who otherwise would struggle to get access to such services at traditional institutions.
Without early-stage support from a lender like SVB or venture-focused offshoots like RBCx, startups with the potential to bring useful innovation to market might never get out of those early stages, Newal says.
“You need an ecosystem to make that happen. You need a banking infrastructure to make that happen. You need lines of credit and payroll services and a whole stack of different services to enable these startups to become viable. And that was the role that SVB really built,” he says.
Ben Bergen, president of the Council of Canadian Innovators (CCI), says the organization put a call out to its members over the weekend to get a gauge of how many are directly impacted by SVB going under; he pegs that number at under 10 per cent.
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But there’s going to be a “hangover” in tech related to SVB’s collapse, Bergen tells Global News, that could “exacerbate” challenges already facing the sector.
The tech industry has been hit hard as the economic outlook turns with fears of a recession hitting Canada and the U.S. in 2023. Many big names in tech, including Amazon, Microsoft and Canada’s Shopify have gone through heavy layoffs over the past year.
Bergen says it’s difficult to raise capital for early-stage companies trying to get off the ground right now, and the collapse of SVB — a go-to for many founders looking for a startup-friendly lender to get their start — will only make that harder, he argues.
While tech companies didn’t have bank accounts with SVB in Canada, the lender did provide a valuable loan guarantee to some of its Canadian clients, Bergen notes. This guarantee could give startups anything from a bit of flexibility on their finances to a lifeline when they needed it.
With SVB out of the picture, startups have less of a safety net should they face tough times ahead, he says.
“Firms don’t necessarily need that money immediately, but they often use it as a contingency or as a plan for when they are experiencing economic shocks or potential downturns,” Bergen says.
“So that’s also another piece where it’s not going to be felt immediately. But companies’ ability to be resilient, potentially, it’s taken a bit of a hit.”
Bergen says Finance Canada and Freeland’s office have been engaged with CCI from the beginning to ensure there’s stability in the sector.
Global News asked Francois-Philippe Champagne, federal minister of innovation, science and industry, if he has any concerns about knock-on impacts to the tech industry tied to SVB’s collapse, but a spokesperson declined to comment on Monday.
Market cuts rate hike bets amid uncertainty
The instability borne out of SVB’s collapse could ultimately drag down central banks’ interest rate paths, some market watchers are theorizing.
Wall Street flipped from losses to gains on Monday as expectations built that all the furor will mean the U.S. Federal Reserve won’t reaccelerate its rate hikes, as it had been threatening to do.
Such a move could give the economy and banking system more breathing space, but it could also give inflation more oxygen. Rate cuts also often act like steroids for the stock market.
Some investors are calling for the Fed to make cuts to interest rates soon to stanch the bleeding. The wider expectation, though, is that the Fed will likely pause or at least hold off on accelerating its rate hikes at its next meeting later this month.
That would be a sharp turnaround from expectations just a week ago, when many traders were forecasting the Fed would later this month hike its key overnight interest rate by 0.50 percentage points. That would put a tighter squeeze on markets and the economy after the Fed had just downshifted last month to an increase of 0.25 points from earlier hikes of 0.50 and 0.75 points.
A report from Investing.com on Monday also pointed to a turnaround for the Bank of Canada’s rate decisions, shifting from a quarter-point hike in 2023 to a cut of the same magnitude at its next decision on April 12.
Policymakers at Canada’s central bank signalled last week that it would maintain its conditional pause on interest rate hikes, marking a possible peak for its tightening cycle.
With fears the U.S. Fed would continue to push higher, that led some observers to raise alarms about the value of the Canadian dollar diminishing, should the Bank of Canada’s key rate ultimately diverge from its counterpart south of the border.
Some economists speculated there would be pressure on the Bank of Canada to keep pace with the Fed to avoid a weaker loonie fuelling inflation on imports from south of the border, though a senior official with the central bank poured some water on that idea in a speech on Thursday.
Anil Kashyap, economics professor at the University of Chicago Booth School of Business, told Global News on Monday that while next week’s U.S. Fed decision may seem close, there’s still plenty of time for the fervour around SVB to diminish enough to avoid changing its rate path.
“They’ve got a week before they even have to take the decision. That week’s a long time. If things calm down in the next couple of days, I think we’ll go back to regular programming,” he says.
— with files from Global News’ Anne Gaviola, Aaron D’Andrea, Jackson Proskow, Reuters, and The Associated Press
News
Capital gains tax change draws ire from some Canadian entrepreneurs worried it will worsen brain drain – CBC.ca
A chorus of Canadian entrepreneurs and investors is blasting the federal government’s budget for expanding a tax on the rich. They say it will lead to brain drain and further degrade Canada’s already poor productivity.
In the 2024 budget unveiled Tuesday, Finance Minister Chrystia Freeland said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 per cent for businesses and trusts, generating an estimated $19 billion in new revenue.
Capital gains are the profits that individuals or businesses make from selling an asset — like a stock or a second home. Individuals are subject to the new changes on any profits over $250,000.
The government estimates that the changes would impact 40,000 individuals (or 0.13 per cent of Canadians in any given year) and 307,000 companies in Canada.
However, some members of the business community say that expanding the taxable amount will devastate productivity, investment and entrepreneurship in Canada, and might even compel some of the country’s talent and startups to take their business elsewhere.
Finance Minister Chrystia Freeland unveiled the government’s 2024 federal budget, with spending targeted at young voters and a plan to raise capital gains taxes for some of the wealthiest Canadians.
Benjamin Bergen, president of the Council of Canadian Innovators (CCI), said the capital gains tax has overshadowed parts of the federal budget that the business community would otherwise be excited about.
“There were definitely some other stars in the budget that were interesting,” he said. “However, the … capital gains piece really is the sun, and it’s daylight. So this is really the only thing that innovators can see.”
The CCI has written and is circulating an open letter signed by more than 1,000 people in the Canadian business community to Trudeau’s government asking it to scrap the tax change.
Shopify CEO Tobi Lütke and president Harley Finkelstein also weighed in on the proposed hike on X, formerly known as Twitter.
We need to be doing everything we can to turn Canada into the best place for entrepreneurs to build 🇨🇦<br><br>What’s proposed in the federal budget will do the complete opposite. Innovators and entrepreneurs will suffer and their success will be penalized — this is not a wealth tax,…
—@harleyf
Former finance minister Bill Morneau said his successor’s budget disincentivizes businesses from investing in the country’s innovation sector: “It’s probably very troubling for many investors.”
Canada’s productivity — a measure that compares economic output to hours worked — has been relatively poor for decades. It underperforms against the OECD average and against several other G7 countries, including the U.S., Germany, U.K. and Japan, on the measure.
Bank of Canada senior deputy governor Carolyn Rogers sounded the alarm on Canada’s lagging productivity in a speech last month, saying the country’s need to increase the rate had reached emergency levels, following one of the weakest years for the economy in recent memory.
The government said it was proposing the tax change to make life more affordable for younger generations and fund efforts to boost housing supply — and that it would support productivity growth.
A challenge for investors, founders and workers
The change could have a chilling effect for several reasons, with companies already struggling to access funding in a high interest rate environment, said Bergen.
He questioned whether investors will want to fund Canadian companies if the government’s taxation policies make it difficult for those firms to grow — and whether founders might just pack up.
The expanded inclusion rate “is just one of the other potential concerns that firms are going to have as they’re looking to grow their companies.”
He said the rejigged tax is also an affront to high-skilled workers from low-innovation sectors who might have taken the risk of joining a startup for the opportunity, even taking a lower wage on the chance that a firm’s stock options grow in value.
But Lindsay Tedds, an associate economics professor at the University of Calgary, said the tax change is one of the most misunderstood parts of the federal budget — and that its impact on the country’s talent has been overstated.
“This is not a major innovation-biting tax change treatment,” Tedds said. “In fact, when you talk to real grassroots entrepreneurs that are setting up businesses, tax rates do not come into their decision.”
As for productivity, Tedds said Canadians might see improvements in the long run “to the degree that some of our productivity problems are driven by stresses like housing affordability, access to child care, things like that.”
‘One foot on the gas, one foot on the brake’
Some say the government is sending mixed messages to entrepreneurs by touting tailored tax breaks — like the Canada Entrepreneurs’ Incentive, which reduces the capital gains inclusion rate to 33 per cent on a lifetime maximum of $2 million — while introducing measures they say would dampen investment and innovation.
“They seem to have one foot on the gas, one foot on the brake on the very same file,” said Dan Kelly, president of the Canadian Federation of Independent Business.
Some business groups are worried that new capital gains tax changes could hurt economic growth. But according to Small Business Minister Rechie Valdez, most Canadians won’t be impacted by that change — and it’s a move to create fairness.
A founder may be able to sell their successful company with a lower capital gains treatment than otherwise possible, he said.
“At the same time, though, big chunks of it may be subject to a higher rate of capital gains inclusion.”
Selling a company can fund an individual’s retirement, he said, which is why it’s one of the first things founders consider when they think about capital gains.
Mainstreet NS7:03Ottawa is proposing a hike to capital gains tax. What does that mean?
Tuesday’s federal budget includes nearly $53 billion in new spending over the next five years with a clear focus on affordability and housing. To help pay for some of that new spending, Ottawa is proposing a hike to the capital gains tax. Moshe Lander, an economics lecturer at Concordia University, joins host Jeff Douglas to explain.
Dennis Darby, president and CEO of Canadian Manufacturers & Exporters, says he was disappointed by the change — and that it sends the wrong message to Canadian industries like his own.
He wants to see the government commit to more tax credit proposals like the Canada Carbon Rebate for Small Businesses, which he said would incentivize business owners to stay and help make Canada competitive with the U.S.
“We’ve had a lot of difficulties attracting investment over the years. I don’t think this will make it any better.”
Tech titan says change will only impact richest of the rich
Toronto tech entrepreneur Ali Asaria will be one of those subject to the expanded capital gains inclusion rate — but he says it’s only fair.
“It’s going to really affect the richest of the rich people,” Asaria, CEO of open source platform Transformer Lab and founder of well.ca, told CBC News.
“The capital gains exemption is probably the largest tax break that I’ve ever received in my life,” he said. “So I know a lot about what that benefit can look like, but I’ve also always felt like it was probably one of the most unfair parts of the tax code today.”
While Asaria said Canada needs to continue encouraging talent to take risks and build companies in the country, taxation policies aren’t the most major problem.
“I think that the biggest central issue to the reason why people will leave Canada is bigger issues, like housing,” he said.
“How do we make it easier to live in Canada so that we can all invest in ourselves and invest in our companies? That’s a more important question than, ‘How do we help the top 0.13 per cent of Canadians make more money?'”
More money will land in the pockets of Canadian families on Friday for the latest Canada Child Benefit (CCB) installment.
The federal government program helps low and middle-income families struggling with the soaring cost of raising a child.
Canadian citizens, permanent residents, or refugees who are the primary caregivers for children under 18 years old are eligible for the program, introduced in 2016.
The non-taxable monthly payments are based on a family’s net income and how many children they have. Families that have an adjusted net income under $34,863 will receive the maximum amount per child.
For a child under six years old, an applicant can annually receive up to $7,437 per child, and up to $6,275 per child for kids between the ages of six through 17.
That translates to up to $619.75 per month for the younger cohort and $522.91 per month for the older group.
The benefit is recalculated every July and most recently increased 6.3 per cent in order to adjust to the rate of inflation, and cost of living.
To apply, an applicant can submit through a child’s birth registration, complete an online form or mail in an application to a tax centre.
The next payment date will take place on May 17.
Keffiyehs remain banned in the Ontario Legislature after a unanimous consent motion that would have allowed the scarf to be worn failed to pass at Queen’s Park Thursday.
That vote, brought forth by NDP Leader Marit Stiles, failed despite Premier Doug Ford and the leaders of the province’s opposition parties all stating they want to see the ban overturned. Complete agreement from all MPPs is required for a motion like this to pass, and there were a smattering of “nos” after it was read into the record.
In an email on Wednesday, Speaker Ted Arnott said the legislature has previously restricted the wearing of clothing that is intended to make an “overt political statement” because it upholds a “standard practice of decorum.”
“The Speaker cannot be aware of the meaning of every symbol or pattern but when items are drawn to my attention, there is a responsibility to respond. After extensive research, I concluded that the wearing of keffiyehs at the present time in our Assembly is intended to be a political statement. So, as Speaker, I cannot authorize the wearing of keffiyehs based on our longstanding conventions,” Arnott said in an email.
Speaking at Queen’s Park Thursday, Arnott said he would reconsider the ban with unanimous consent from MPPs.
“If the house believes that the wearing of the keffiyeh in this house, at the present time, is not a political statement, I would certainly and unequivocally accept the express will of the house with no ifs, ands or buts,” he said.
Keffiyehs are a commonly worn scarf among Arabs, but hold special significance to Palestinian people. They have been a frequent sight among pro-Palestinian protesters calling for an end to the violence in Gaza as the Israel-Hamas war continues.
Premier calls for reversal
Ford said Thursday he’s hopeful Arnott will reverse the ban, but he didn’t say if he would instruct his caucus to support the NDP’s motion.
In a statement issued Wednesday, Ford said the decision was made by the speaker and nobody else.
“I do not support his decision as it needlessly divides the people of our province. I call on the speaker to reverse his decision immediately,” Ford said.
Ontario Premier Doug Ford reiterated Thursday that he does not support Speaker Ted Arnott banning keffiyehs in the Ontario Legislature because they are “intended to be a political statement,” as Arnott said in an email Wednesday.
PC Party MPP Robin Martin, who represents Eglinton–Lawrence, voted against the unanimous consent motion Thursday and told reporters she believes the speaker’s initial ruling was the correct one.
“We have to follow the rules of the legislature, otherwise we politicize the entire debate inside the legislature, and that’s not what it’s about. What it’s about is we come there and use our words to persuade, not items of clothing.”
When asked if she had defied a directive from the premier, Martin said, “It has nothing to do with the premier, it’s a decision of the speaker of the legislative assembly.”
Stiles told reporters Thursday she’s happy Ford is on her side on this issue, but added she is disappointed the motion didn’t pass.
“The premier needs to talk to his people and make sure they do the right thing,” she said.
Stiles first urged Arnott to reconsider the ban in an April 12 letter. She said concerns over the directive first surfaced after being flagged by members of her staff, however they have gained prominence after Sarah Jama, Independent MPP for Hamilton Centre, posted about the issue on X, formerly Twitter.
Jama was removed from the NDP caucus for her social media comments on the Israel-Hamas war shortly after Oct. 7.
Jama has said she believes she was kicked out of the party because she called for a ceasefire in Gaza “too early” and because she called Israel an “apartheid state.”
Arnott told reporters Thursday that he began examining a ban on the Keffiyeh after one MPP made a complaint about another MPP, who he believes was Jama, who was wearing one.
Liberals also call for reversal
Ontario Liberal Leader Bonnie Crombie also called for a reversal of the ban on Wednesday night.
“Here in Ontario, we are home to a diverse group of people from so many backgrounds. This is a time when leaders should be looking for ways to bring people together, not to further divide us. I urge Speaker Arnott to immediately reconsider this move to ban the keffiyeh,” Crombie said.
Keffiyehs are a common garment across the Arab world, but they hold a special meaning in the Palestinian resistance movement.
Stiles said MPPs have worn kilts, kirpans, vyshyvankas and chubas in the legislature, saying such items of clothing not only have national and cultural associations, but have also been considered at times as “political symbols in need of suppression.”
She said Indigenous and non-Indigenous members have also dressed in traditional regalia and these items cannot be separated from their historical and political significance.
“The wearing of these important cultural and national clothing items in our Assembly is something we should be proud of. It is part of the story of who we are as a province,” she said.
“Palestinians are part of that story, and the keffiyeh is a traditional clothing item that is significant not only to them but to many members of Arab and Muslim communities. That includes members of my staff who have been asked to remove their keffiyehs in order to come to work. This is unacceptable.”
Stiles added that House of Commons and other provincial legislatures allow the wearing of keffiyehs in their chambers and the ban makes Ontario an “outlier.”
Suppression of cultural symbols part of genocide: MPP
Jama said on X that the ban is “unsurprising” but “nonetheless concerning” in a country that has a legacy of colonialism. “Part of committing genocide is the forceful suppression of cultural identity and cultural symbols,” she said in part.
“Seeing those in power in this country at all levels of government, from federal all the way down to school boards, aid Israel’s colonial regime with these tactics in the oppression of Palestinian people proves that reconciliation is nothing but a word when spoken by state powers,” she said.
Amira Elghawaby, Canada’s Special Representative on Combatting Islamophobia, said on X that it is “deeply ironic” on that keffiyehs were banned in the Ontario legislature on the 42nd anniversary of Canada’s Charter of Rights and Freedoms.
“This is wrong and dangerous as we have already seen violence and exclusion impact Canadians, including Muslims of Palestinian descent, who choose to wear this traditional Palestinian clothing,” Elghawaby said.
Arnott said the keffiyeh was not considered a “form of protest” in the legislature prior to statements and debates that happened in the House last fall.
“These items are not absolutes and are not judged in a vacuum,” he said.
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