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Timing is everything: how Canada got into a pandemic economy — and how it might get out – CBC.ca

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This is the second article in a series looking at some of the lessons learned from the first months of the COVID-19 pandemic and how Canada moves forward.

The pandemic may well take millions of lives around the world before it ends. It already has drained trillions of dollars from the world economy.

Where once there was wealth, now there’s a mountain of debt — an unpaid tab that, in Canada, is growing at a rate of hundreds of millions of dollars a day.

“And the federal government being best placed to carry that debt, a lot of the measures that the feds have brought in [are] effectively them just taking the load off of individuals businesses and sub-national governments,” said economist Trevor Tombe of the University of Calgary. “And that is a good move.”

Keeping that debt on the federal government’s books allows businesses to carry on without fear of bankruptcy and keeps consumer spending alive. And most economists agree that Canada’s federal government should be able to carry its pandemic debt without too much of an effect on the real economy — as long as the current measures don’t go on for too long.

The pandemic is a real-time laboratory for testing the economic and political limits of government deficit spending in a crisis. The experiment isn’t over yet, and attention is now turning to how quickly the federal government can turn off the emergency spending tap — and what sort of stimulus should replace it.

One lesson learned so far is that the governments that stepped up quickly with big rescue packages have tended to be the ones keeping the damage done by job losses to a minimum.

That has been Canada’s core economic strategy to fight COVID-19, one it shares with several European countries. “It’s something that the federal government in the States hasn’t done to the same extent,” said Tombe.

Faster is better

Washington’s epic level of political dysfunction slowed its response to the crisis. The consequences of that delay show up in a comparison of unemployment numbers. As 2019 drew to a COVID-oblivious close, Canada’s unemployment rate was significantly higher than that of the U.S. (5.6 per cent vs. 3.5 per cent). Today, after staggering job losses on both sides of the border, the disparity has all but disappeared — both the Canadian and U.S. unemployment rates are at an awful 13 per cent.

A lone person walks the empty streets in Toronto’s Kensington Market in April. The pandemic shutdown drove the unemployment rate above 13 per cent in Canada, preliminary figures show. (Nathan Denette/The Canadian Press)

By international standards, the government of Prime Minister Justin Trudeau was not slow to set up its benefits system. The federal government’s smooth and rapid processing of millions of claims was a bureaucratic achievement few other countries were able to pull off.

But Ottawa was responding to an unprecedented economic crisis brought on by an unprecedented global health crisis. Its first priority was to support individuals unable to work due to business shutdowns; by quickly rolling out the Canada emergency response benefit (CERB), the federal government gave household incomes the bracing they needed to allow the stay-at-home policy to have an effect on the virus’s spread.

Only after CERB was in place did the federal government turn its attention to the needs of employers. Its critics say it got the timing wrong.

“I want to be fair to government,” Dan Kelly, CEO of the Canadian Federation of Independent Business. The CFIB lobbied the government hard in the early weeks of its pandemic response to deploy a wage subsidy that would preserve jobs.

“This was a brand new event of a short-term or medium-term giant disaster for the economy. So a lot of the things that were in the Department of Finance toolkit for the normal recession just didn’t work.”

Too little, too late?

Kelly and the CFIB argued that while the need to get the CERB program moving in the early weeks of the pandemic was obvious, Ottawa also should have started on a wage subsidy earlier — to preserve a “connection between employers and employees” that would prevent layoffs and ensure a smooth return to normal business once pandemic restrictions lift.

The government made loans available to businesses relatively early in the crisis. But even on favourable terms, few businesses wanted to take on new debt when they scarcely knew where their next dollar was coming from.

Employers “had no choice” but to start laying people off, said Kelly. “As a result, millions of Canadians lost their jobs or are on the CERB benefit, and now in many cases are hesitant to come back.”

A worker boards up a closed clothing store in Vancouver. The federal government moved quickly to get individual financial supports out the door, but was criticized for being slow to help businesses retain workers and manage rent payments. (The Canadian Press)

When the government did introduce a wage subsidy, said Kelly, it was too small to change the math for most business. Over subsequent weeks, the subsidy became larger and conditions were removed. But by then it was too late for some employers.

“The wage subsidy was a good program and is a good program,” said Kelly. “Unfortunately, it took about a month for a government to announce its intention to provide a substantive wage subsidy, and then another six weeks after that before any money was delivered …

“Months later … we’re seeing that right now with the challenges related to the CERB program. We’ve had lower take up of the wage subsidy than expected and far higher take up of the CERB program than than was expected.”

A manageable deficit — so far

Hindsight is 20/20, of course — but even the experts can’t predict the pandemic’s economic endgame. Tombe said Canada entered the pandemic with the key advantage of healthy public accounts, at least at the federal level.

“The ability of the federal government to borrow and to service that debt is actually quite high,” he said. “Couple that with the fact that interest rates are pretty low, and it looks like even given the massive borrowing that is going to be taking place this year, the debt service costs — the amount of interest payments that the federal government will need to make — are not going to be all that much higher than they were last year.”

The size of a government’s debt matters less than its ability to service it, Tombe said. The federal government can easily shoulder the cost of servicing its pandemic debt — and could even start paying it down aggressively in the near future without pursuing a policy of painful austerity.

“We could eliminate the COVID-related debt federally within about 10 years using a revenue increase equivalent to about 1.5 per cent on the GST,” he said. “Or we could do it on the spending side by lowering the rate of spending growth by about 1 per cent per year or below what it would otherwise have been.”

The plight of the provinces

The situation is far less reassuring for the provinces, said Tombe.

“Interest rates for provinces are typically about one percentage point higher than [for] the federal government. So deficits and debt are more expensive for them,” he said.

“Provinces are also the front line in terms of health care delivery and managing this current crisis. So … it looks like collectively [the provinces] are going to have a deficit for this year potentially on the order of about $100 billion.

“Ontario, Quebec, Alberta and B.C. can handle it. Provinces like Newfoundland, though, are legitimately facing a potential crisis where they may not be able to access private credit markets and will have no choice but to borrow through the federal government.”

Ontario Premier Doug Ford, left, has criticized the federal government’s proposed pandemic aid program for provinces. He is seen with Prime Minister Justin Trudeau in December, 2018. (Paul Chiasson/The Canadian Press)

Earlier this month, the Trudeau government offered a $14-billion package to provincial governments to help them safely reopen their economies. Ontario Premier Doug Ford called the sum too small; other premiers criticized the conditions imposed by the federal government on how it must be spent.

The hunt for exit strategies

Tombe said he thinks the provinces risk missing the lesson — “that they need to think long-term and ensure they have the capacity to absorb major shocks.”

With attention now turning to a pandemic exit strategy, the federal government will face competing demands for support and stimulus from different sectors of the economy. Tombe said it’s vitally important for Ottawa to start winding down its emergency measures in the current fiscal year — because it’s running out of road.

“We’re looking at a deficit that’s potentially well over 10 per cent of GDP that cannot be sustained,” he said.

“A one year hit? We can manage it. Two or three or more? That wouldn’t be possible. So unwinding these measures in the current fiscal year is going to be quite important.”

Canada can still shoulder a “large deficit” next year, he said — something on the order of the $60 billion deficit Canada ran when the financial crisis hit in 2009. It’ll have to, if it intends to prime the economy’s pump with federal money.

Recently, a group of leading figures in finance and academia joined experts in sustainable development (and Gerald Butts, Trudeau’s ex-chief of staff) in forming the Task Force for a Resilient Recovery. They’re issuing polling and reports on how the pandemic recovery can include infrastructure spending to reduce Canada’s carbon footprint and prepare it for a post-carbon economy.

Building a ‘better’ economy

“Rather than just saying we’ve just got to put things back the way they were, this is actually an opportunity to build back better,” said task force member James Meadowcroft of Carleton’s School of Public Policy and Administration.

While the group is only halfway through forming its recommendations, said Meadowcroft, it’s already identified one target for infrastructure work: buildings. “It’s pretty clear one of the big sectors … that carbon emissions come from at the present day is buildings … both houses where people live but also commercial buildings, retail space and so on,” he said.

Kelly argues that infrastructure spending is far too slow to have the desired effect. “If we’re looking for a quick recovery, infrastructure is not it. Those projects take months and months and months before anything actually happens, before money gets out the door,” he said.

“One of the big lessons I think government needs to take away from this is that speed is of critical importance.”

Meadowcroft said the kind of infrastructure work his group is recommending is all about putting the unemployed to work quickly.

“It’s not about giving money to research scientists to go and figure something out,” he said. “This would be something that would have to be done anyway as we gradually tackle climate change. But it’s also something that would employ a lot of people and we already know most of the technology.”

Expect to hear more of these arguments over the coming weeks and months. If the pandemic taught Canada and the world nothing else, it demonstrated that shutting down an economy can be a lot easier than starting one up again.

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US Stock Futures Gain as Market Weighs Virus Cases, Economy – BNN

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(Bloomberg) — U.S. stock index futures rose in Asia on Monday as investors focused on the prospects for an expansion of economic stimulus to help counter the impact of the spreading global pandemic.

September contracts on the S&P 500 rose 0.9% as of 11:12 a.m. in Tokyo, after an advance of 4.1% last week. Futures on the Dow Jones Industrial Average rose 1% and those on the Nasdaq 100 Index added 1.2%. U.S. financial markets were closed on Friday before Independence Day on July 4.

“Asia markets look set for mixed moves going into the fresh week with concerns still centered on the continued Covid-19 spread, all weighed against the continued data optimism,” Jingyi Pan, a market strategist at IG Asia, wrote in a note. “With U.S. states continuing to post record cases into the July 4 weekend and the World Health Organization likewise having reported a one-day high in global infections over the weekend, the battle between the Covid-19 drag and improving economic conditions continues.”

Coronavirus cases in the U.S. increased by almost 56,000 on Sunday, a 2% rise that outpaced the 1.8% average daily increase over the past week, according to Johns Hopkins University.

June employment data came in stronger than forecast on Thursday. Goldman Sachs Group Inc. economists revised down their estimates for the U.S. economy this quarter, but predicted it will be back on track in September after some states imposed fresh restrictions to combat the coronavirus. Congress is set to resume talks on the next stimulus bill later this month.

©2020 Bloomberg L.P.

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The TaxLetter: Tax Planning In A Down Economy – COVID-19 Tax Tips – Tax – Canada – Mondaq News Alerts

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To print this article, all you need is to be registered or login on Mondaq.com.

Back in early February, before we all went into lock-down due to
Covid, I wrote about implementing a refreeze in a down economy. Who
knew back then that the economy would continue to drop like it did.
So it made me consider what other tax planning strategies to
consider, in addition to a refreeze, while our economy is still
down (if you haven’t read my February article, consider doing
so).

Triggering losses

I think it would be a safe bet to say that your investments
might have taken a hit in the last few months. So you may want to
consider which of your losers you might want to cut loose. By
triggering the loss in 2020, you can carry it back three years to
offset against any capital gains in previous years, or you can
carry forward the capital loss indefinitely to offset against
future gains. Note: If you are lucky enough to have gains in 2020,
you have to first use the losses against current year gains.

NOTE: Beware of the superficial loss rules when
triggering a loss. If you’re selling on the market to take a
loss, and you buy back an identical investment within 30 days
before or after the sale, the loss will be denied. Although these
rules are designed to counter artificial losses, they could apply
inadvertently – for example if you sell, then change your mind and
buy in again, maybe after the stock has dropped further. The rules
will also apply if your spouse buys back in within the 30-day
period (or a controlled company), but not if a child or parent
reinvests. The rules apply not only to stocks, but to mutual funds
as well. But they only apply if you repurchase an identical asset.
So if you sell Bank A and buy Bank B, you’re OK.

Note 2: When assessing whether you’re in a
loss position, don’t forget that capital gains are calculated
in Canadian dollars – so currency fluctuations can be a key
consideration. If the Canadian dollar has appreciated against the
currency there will tend to be losses.

Crystallizing gains

On the flip side, instead of triggering losses, you may want to
also look at triggering a capital gain. There has been much
speculation about whether the CRA will increase the capital gains
inclusion rate (currently at 50 per cent) in the 2020 Federal
Budget. Before Covid, the concern was due to the political climate
(i.e. the Liberals had a minority government and the NDPs had
campaigned on increasing taxes). The 2020 Budget was delayed with
the onset of Covid; and now the speculation is that perhaps the
government might increase the capital gains inclusion rate as a way
to raise money to fund the various government relief measures
released as a result of Covid. So if you anticipate a liquidity
event in 2020, you may want to consider crystallizing your capital
gain prior to the release of the 2020 Federal Budget, just in case.
And if you are not sure if there will be a liquidity event or not,
you can consider a strategy that would put the pieces in place to
trigger a gain, but still defer that decision until after the
Budget is released (you should reach out to your tax advisor to
discuss possible strategies). As to when the 2020 Federal Budget is
going to be released, your guess is as good as mine. So you should
have these discussions with your tax advisor sooner than later.

Capital Dividend Clean UP

If you hold your investments in a corporation, and are thinking
of triggering losses as discussed above, then the first thing to do
is to first check your corporation’s capital dividend account
(CDA) balance. What is a CDA? Well, as you know, only 50 per cent
of a capital gain is subject to tax. So when your corporation
realizes a capital gain, it only pays tax on 50 per cent of the
gain. The other 50% “tax-free” portion of the capital
gain is added to the corporation’s CDA. A tax-free capital
dividend can then be paid out of the corporation to you, the
shareholder (as long as you are a Canadian resident). However, if
the corporation realizes a capital loss as part of a loss selling
strategy, those losses will grind down the CDA balance and you will
lose the ability to take money out tax-free. So it is very
important to make sure you clear out your CDA by declaring a
taxfree capital dividend to you before you trigger any losses.

And if you don’t have any cash to pay the capital dividend,
the corporation can satisfy the capital dividend with a demand
promissory note so you can always pull that amount out tax-free in
the future.

Income Splitting opportunities

The Tax Act is full of various rules to prevent you from trying
to sprinkle income to lowtax family members (known as income
splitting). The “attribution rules” for example, would
apply where you transfer property or funds to your spouse
(including common law spouse) minor children, minor grandchildren
or minor nieces/nephews (“Family Members”), unless you
fall under certain exceptions. But in down economies, these
exceptions to the attribution rules generally get spotlighted.

One of these exceptions is the prescribed rate loan strategy. As
I have discussed in previous articles, you can avoid the
attribution rules if you, the higher income family member, loan
funds to the low-income Family Members, provided that they pay you
interest at the “prescribed rate” in effect at the time
the loan is made. Moreover, the interest on this loan has to be
paid by no later than January 30 each year. If you miss even one
January 30 deadline, the attribution rules will apply forevermore.
The prescribed rate has been at 2 per cent for the last little
while, but it is going down to 1% on July 1st, 2020 – so the
opportunity to income split through a prescribed loan will become a
lot more attractive.

If you don’t have cash to loan to your Family Member,
consider doing a loan “in kind”. For example, if you have
a securities portfolio in your name, transfer the portfolio to your
low-income spouse and have your spouse issue a demand promissory
note reflecting the prescribed interest rate for an amount equal to
the fair market value of the portfolio at the time of the transfer.
However, this transfer may be subject to capital gains tax by you,
the transferor, as the transfer would have to be made at the
portfolio’s fair market value. But if your portfolio has gone
down in value, then now is time to make that transfer.

NOTE: if you want to loan to any minor Family
Members, you should do so through a family trust, as minors cannot
legally borrow from you.

Defer RRSP Contributions

If your income / salary has gone down this year due to Covid,
you may want to consider deferring any RRSP contributions until
next year, especially if you expect to be in a lower tax bracket
for 2020. So hopefully, when you are back into the top bracket next
year, you can double up your RRSP contributions for 2021.

Originally Published by
The TaxLetter®
June 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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As post-lockdown economy sinks, experts warn U.K. knife crime could rise again

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Every Sunday as the sun sets over her coastal home, Sandi Bogle looks out at the water before lighting a candle for her nephew, Bjorn Brown.

“He was amazing,” she said. “He used to come and spend a lot of time with me and my kids. We used to go on holiday together. He had a whole future ahead of him, and it was just taken away.”

Three years have passed since knife-wielding thugs killed Brown, 23, an aspiring musician. No arrests have been made, police have not speculated about a motive, and his family’s grief remains raw.

Sadly, they’re not alone.

In the time since Bjorn’s killing, Britain’s knife crime crisis has accelerated. More than 45,000 blade-related offenses — the highest number on record — were committed in England and Wales last year, according to official government statistics. Now, as the United Kingdom plans to emerge from lockdown, there are fears of a new surge in fatal stabbings.

Gang rivalries revisited after months of confinement, social media scores that need to be settled, even the normalization of masks — in post-pandemic Britain, there will be no shortage of criminal triggers.

Police shot and killed a knife-wielding man in a hotel in Glasgow, Scotland, after he went on a rampage that left six people, including a police officer, hospitalized on June 27.

Police forensics officers at the scene of a fatal stabbing in Bexley in southeast London on Oct. 13.Dominic Lipinski / AP file

The suspect was identified as a Sudanese immigrant named Badreddin Abadlla Adam, 28.

Adam was staying in the city center hotel, along with about 100 other asylum-seekers, after having been moved there during the pandemic. Authorities say they are investigating.

For experts, however, the most feared consequences of COVID-19 are those not immediately obvious, but the disease’s deeper socioeconomic effects.

John Sunderland, a retired police superintendent, spent two decades confronting the conditions in which violence ferments, and he knows all too well the agony it leaves behind.

“I remember the sound of his family initially singing hymns and then just beginning to wail — an incredibly haunting sound,” he said, recalling the murder of Kodjo Yenga, 16, of West London, whose fatal stabbing in 2007 signaled the start of the city’s knife emergency.

In the years that have followed, the crisis’s racial dimension have come under scrutiny. In 2018, over a third of London’s serious youth violence offenders — and a quarter of the victims — were Black, official statistics revealed.

While that suggests that the city’s Black community (which constitutes 13 percent of London’s population) is disproportionately blighted by youth violence, it’s important to note that 2 in 5 serious youth violence offenders and victims were of white heritage. Likewise, statistical analysis indicates that, outside London, ethnicity and violent crime figures correlate far closer with population proportions.

Experts like Sunderland attribute Britain’s blade attack epidemic to the effects of poverty and a lack of prospects more than race.

The links between social deprivation and knife crime are well documented. In neighborhoods where unemployment is high and economic mobility is low, violent behavior breeds. When funding for local community-minded programs is cut, the spiral of hopelessness and aggression intensifies. That, Sunderland said, is why the financial fallout of the coronavirus pandemic is so concerning.

“So many of society’s natural safety nets for the boys and young men caught up in knife crime have already disappeared in most parts of the country,” he said. “The cost of austerity has always been greatest for those least able to bear it.”

This point was made painfully clear last year, when new local government statistics revealed that three-quarters of London’s most violent boroughs were among the 10 most deprived and that all had higher proportions of child poverty than the city’s average.

From left, Sarah Jones, a member of Parliament, with children who have been affected by knife crime, delivers a letter to British Prime Minister Boris Johnson’s home at 10 Downing Street last month. David Mirzoeff / Press Association via AP file

The data reflected an “appalling side effect” of the government austerity, Mayor Sadiq Khan said, adding that “you can’t cut police officers, public services, preventative measures and ignore the most vulnerable people in our country at the same time as keeping crime low.”

James Alexander, a criminology expert at London Metropolitan University, reached a similar conclusion. Inner-city housing estates are “conveyor belts” of violence, his research indicated, with a constant turnover of cash-strapped youngsters turning to crime. As Britain’s lockdown lifts and the economic aftershocks of COVID-19 are felt, the process is likely to accelerate, he said.

“Going into next year, we’re almost certain to see a rebounding of knife crime and youth violence. … There’ll be more pressure on young people to make money” illegally, he said.

Tackling the surge requires a systemic approach, Alexander said, one that promotes collaboration to heal community breakdown.

“When you talk to the parents, they feel very isolated,” he said. “Instead of going ‘I’m a youth worker, I’ve got the solution,’ [outreach programs] need to be more collaborative. They need to say, ‘I’m a youth worker, let’s help develop the solution together.'”

One program, the so-called violence reduction unit, holds the hopes of many. Pioneered by American epidemiologists in the crime-ridden Chicago of the 1990s, the program addresses street violence through the prism of public health, treating it as a symptom of deprivation and poverty.

Rather than focus simply on hard-power policing and custodial punishment, city authorities started working to improve the prospects of would-be criminals, offering them an alternative to gang membership with job opportunities and education.

Officials in Glasgow adopted a similar strategy. Guided by a simple principle — that violence is preventable, not inevitable — the city’s violence reduction unit worked with schools, health groups and social services to disrupt the root causes of knife crime, giving youngsters a springboard to build better, nonviolent lives. Twelve years after its inception in 2005, Glaswegian homicide rates had fallen by half.

Might London benefit from a similar program? Its mayor thinks so, and last year he launched the city’s own violence reduction unit. “I am leading London’s response to understanding the causes of violent crime and working to stop it spreading,” Khan said.

Anti-knife crime campaigners on Westminster Bridge in central London, calling for action over recent bloodshed in April. Stefan Rousseau / Press Association via AP file

But not everyone is convinced.

“Would it not be better to go to somewhere — maybe Germany — that doesn’t have such a big knife crime or serious youth violence problem and ask: ‘Why do they not have the problem? What can we copy from what they’re doing?'” Alexander asked.

Sunderland, the former police superintendent, has reservations, too. While the violence reduction unit formula is promising, he worries that — having eschewed Glasgow’s rigorously apolitical approach — the program in London is doomed to fail.

“When you have political leadership, the approach becomes partisan [and] short term in its focus, because it’s very difficult to get politicians to look beyond the horizon of the next election,” he said.

For the family of Bjorn Brown, that is disheartening news. Deprived of justice, they seek solace in the hope that, one day, others might be spared their pain.

“We have to keep talking. It doesn’t take just one person to build a child, it takes a village, it takes a community, it takes the country,” said his aunt, Sandi.

“I don’t want my nephew to have died for nothing.”

Source:- NBC News

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