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‘Tax fairness’: Bill Morneau says Ottawa’s wide-ranging review could target tax planning strategies

Canadians shouldn’t assume that the lack of major tax hikes in Budget 2017 means no big changes are coming, Finance Minister Bill Morneau said Friday.

Morneau was in Toronto to promote the federal government’s new budget through a lunch hour speech to a Bay Street crowd, and it wasn’t lost on him that many in the audience are high-income earning professionals working in the financial sector.

“Last year, we asked some of you to pay more in tax, so that we could cut taxes for the middle class,” Morneau said.

Prior to this week, there were fears that Budget 2017 would introduce measures that would demand the rich pay even more. The budget document that emerged on Wednesday talked about “tax fairness” and arguably focused more on smaller-sized tweaks to the system than a major overhaul.  

Speaking to reporters after the speech, Morneau said the government is in the midst of a wide-ranging review that aims to reduce what the budget document describes as “tax benefits that unfairly help the wealthiest Canadians rather than the middle class and those working hard to join it.”  

The government is concerned with tax planning strategies in which individuals use private corporations as a means to reduce their personal tax burdens.

In so-called “income sprinkling,” a business owner might distribute profits from the corporation to close family members in lower tax brackets. The government is also studying whether individuals are using corporations to hold what are really personal investment portfolios, and are benefiting from pay-out strategies in which income is distributed as capital gains, which are taxed at a lower rates.

But if you want a hint on what will come of that study, you’ll have to wait, the minister said.

“We have announced the measures that we want to announce right now,” Morneau said when asked to elaborate on the government’s intentions.

“There will be a paper that will be coming out in the near term. I can’t tell you the exact date, but it won’t be that long, to explain where we see the issues, how we intend on approaching those, seeking input, and we will move expeditiously in considering how we can implement,” he said. “Our paper will provide more insights into that.”

Morneau also noted Canada’s official acceptance, announced Thursday, as a member of the Asian Infrastructure Investment Bank. The government had announced in Budget 2017 that it would pay $256 million over five years to acquire shares in the bank.

“The AIIB will help sustain growth in Asia and represents an opportunity for Canada to further engage in multilateral development efforts that support inclusive economic growth in Asia and beyond.”

Financial Post

dhasselback@nationalpost.com

twitter.com/vonhasselbach

What the building of Keystone XL pipeline will mean for Canada and the Canadian energy industry

The U.S. State Department’s approval of the Keystone XL pipeline on Friday concludes a bitter political battle that stretched on for more than eight years. Calgary-based TransCanada Corp. first filed its application to build the project in 2008. Since then, the proposal was met with a slew of lawsuits, regulatory snags, protests and political jockeying.

The project still has several hurdles to clear before the company can actually move ahead with construction. It will need to secure several state-level permits, including in Nebraska where opposition to the project has been most acute.

Whether the project ultimately gets built is an open question. But today there is still discrepancies over what impact, if any, the project would have on the Canadian economy and the oil and gas sector. Below is a snapshot of a few key numbers.

42,100 – Jobs created by Keystone XL, according to U.S. State Department

The number of jobs that would be created by the project is a highly contested figure. Project proponents tend to provide generous job estimates based on “indirect” or “induced” jobs that would be hypothetically created by the expected boost in economic activity. Often, job estimates include any position that lasts for at least one year. Other estimates peg Keystone’s job creation numbers closer to just a few thousand, depending on varying parameters like whether the job is full-time and directly created by the pipeline.

$11 billion – Total compensation for Ontario workers over 25-year period

Most of the employee compensation benefits from Keystone XL would be concentrated in Alberta. But other provinces would also see an uptick in activity. A report in July 2012 by the Canadian Energy Research Institute (CERI) found that worker compensation in Ontario—mostly in its manufacturing sector—would rise nearly $10.68 billion between 2011 and 2035 if the project goes ahead.

US$35 – Spread between WCS and Mexican Maya in January 2013

A central argument for why Keystone XL should be built is the discount suffered by Canadian oil producers relative to its competitors. This is typically measured in the difference in price between two grades of crude. Western Canada Select, which is often used as a benchmark for Canadian heavy oil, has for years sold at a steep discount to other producers. Mexican Maya, which is often compared to WCS due to their similar heavy-sour qualities, sold for around US$30 more than WCS in the period between November 2012 and February 2013. In January the figure was US$35. However, falling oil prices and increased efficiency has substantially closed that differential in recent years, and weakened the argument for Keystone XL according to some opponents. Today, WCS’s discount to Mexico’s Maya is below US$10.

$8 – Per-barrel cost difference when shipping oil via pipeline versus rail

For oil producers, pipelines are a cheaper shipping option than rail. Analyst estimates vary, but shipping oil to the Gulf Coast is about $8 per barrel cheaper by pipeline than rail, which is also more dangerous and prone to spills. As oil prices have fallen in recent years and pipeline constraints have eased, some analysts now put that figure closer to about $5 or $6 per barrel. This is particularly the case as more oil companies begin investing in rail infrastructure as Canada could face another pipeline shortage in coming years.    

3,108 – Days required to approve Keystone XL

TransCanada filed its application for Keystone XL on September 19, 2008. In March of 2010 the National Energy Board approved the Canadian portion of the project, and the U.S. State Department, after initially delaying a decision, eventually recommended the pipeline be approved. A bill approving the construction of the pipeline was passed by the U.S. Senate in February 2015, but was vetoed later that year by former president Barack Obama. In his first week in office in January 2017, U.S. President Donald Trump invited TransCanada to resubmit its application. On Friday the project was approved by the Trump administration.

Mexico can survive the end of NAFTA, willing to walk away from negotiations, diplomat says

Mexico is prepared for the end of the North American Free Trade Agreement if it can’t reach a deal with the U.S. and Canada that benefits all three nations, the country’s top diplomat said.

President Enrique Pena Nieto’s administration is committed to keeping North America tariff-free and has set clear limits for what it can accept in negotiations with the U.S., Foreign Relations Minister Luis Videgaray said Thursday in an interview with Bloomberg TV. He added that his strong relationship with Jared Kushner, President Donald Trump’s son-in-law and adviser, is an asset for Mexico going forward.

Videgaray said that Mexico is open to including a peso stabilization mechanism, alluded to earlier this month by U.S. Commerce Secretary Wilbur Ross, as part of a NAFTA update, as long as it preserves free trading for the peso. Improved rules of origin could also added, he said. Like central bank Governor Agustin Carstens, Videgaray said he views the nation’s currency as undervalued even after its world-leading rally since Trump’s inauguration. The rebound shows that investors understand the three NAFTA partners are committed to reaching a good deal, he said.

“If what is on the table is something that is not good for Mexico, Mexico will step away from NAFTA” and rely on the rules of the World Trade Organization, Videgaray said, speaking on the sidelines of Mexico’s annual banking convention in the resort city of Acapulco. “There will be a future without that. The question is ‘Why would you want to do that, if we can have a trade deal that can be much improved to the benefit of the three countries?’”

Mexico felt the initial brunt of Trump’s presidency after the peso tumbled amid threats he’d rework or scrap NAFTA and make Mexico pay for a border wall to keep out undocumented immigrants. The currency has since made a comeback after Trump administration officials including Ross and trade adviser Peter Navarro said that the U.S. and Mexico have an opportunity to reach a NAFTA deal that can benefit both countries.

Asked about Trump’s “America First” mantra, Videgaray said that while any sovereign nation should be prioritizing its own interests, the U.S.-Mexico relationship and NAFTA aren’t zero sum games.

“For any country, and that includes Mexico and the U.S., having good, robust relationships with crucial allies and neighbours — that’s putting your country first.”

In NAFTA Showdown, Mexico Has Wild Card to Play Against U.S.

Videgaray said NAFTA should continue to protect investments made in all three countries. While Ross said earlier this month that NAFTA talks will probably start in the latter part of 2017 and suggested they could last a year, Videgaray said the White House has been telling him they expect the renegotiation to begin this summer.

At the same time, Videgaray said Mexico is “very concerned” about democracy in Venezuela, where regional elections have been delayed, the legislature’s powers curbed and political opponents of the government jailed. Mexico wants to work with the region to send a strong message, he said

Videgaray, a 48-year-old, MIT-trained economist, has long been considered to be the master strategist behind Pena Nieto; first as his finance chief when Pena Nieto was governor of the State of Mexico, then as his 2012 campaign manager and later finance minister for his first three years of his presidency. He has forged relationships with both Trump, who has referred to him as a “wonderful man,” and Kushner, who Videgaray on Thursday said is “a very smart person, somebody that I know and trust personally.”

Kushner and Videgaray helped arrange an August visit by then-candidate Trump to meet with Pena Nieto at the presidential residence in Mexico City. While Videgaray resigned days later amid criticism of the trip, he was brought back into the cabinet in January after Trump triumphed.

The Mexico-U.S. relationship “is defined by institutions; it’s not about a particular individual,” Videgaray said. “I think always having somebody that you trust and you know can help in the communication; that is very important. But at the end of the day, it’s institutions that are going to define the future of this relationship.”

Canadians are paying less for food, but a lot more for gas

OTTAWA — The annual pace of inflation in Canada ticked lower in February as higher prices for gasoline were offset in part by lower costs for fresh fruit and vegetables.

Statistics Canada said Friday the consumer price index rose 2.0 per cent on a year-over-year basis in February. The move compared with a 2.1 per cent increase in January. Economists had expected it rise 2.1 per cent in February as well.

Prices were higher in seven of the eight major components, with food the only one to decline.
Excluding gasoline, the February consumer price index was up 1.3 per cent compared with a year ago following a 1.5 per cent in January.

Transportation costs gained 6.6 per cent compared with a year ago, boosted by a 23.1 per cent rise in gasoline — which was at an unusually low level in early 2016. Shelter costs rose 2.2 per cent.

Food costs fell 2.3 per cent as prices for food bought from stores fell 4.1 per cent. Prices for food bought from restaurants rose 2.3 per cent but fresh vegetables dropped 14.0 per cent and fresh fruit slipped 13.3 per cent, partly reflecting a spike in prices last winter.

The annual pace of inflation slowed in seven provinces on a year-over-year basis in February while Ontario and B.C. both held steady at 2.3 per cent. Manitoba was the only province to show an increase in the annual pace of inflation as it increased to 2.3 per cent compared with 2.1 per cent in January.

Statistics Canada said the Bank of Canada’s three preferred measures for core inflation saw year-over-year increases last month of 1.3 per cent, 1.9 per cent and 1.6 per cent.

It looks like the Keystone XL is finally ready to be approved by Trump — but the fight isn’t close to over

President Donald Trump is making good on his promise to approve the Keystone XL oil pipeline — but the fight is far from over.

Instead, it shifts to courtrooms, a Nebraska agency and congressional town hall meetings, where environmental activists and landowners have plotted ways to keep blocking the pipeline TransCanada Corp. has been trying to build for more than eight years. Just winning Nebraska regulators’ approval for Keystone XL’s route through the state could take TransCanada another six months.

“A federal approval of the permit is not the end of the line for this project; there’s still many obstacles,” said Anthony Swift, an attorney with the Natural Resources Defense Council that opposes Keystone. “There’s legal challenges, there’s the Nebraska issues and, frankly, there are the economic and market obstacles.”

The State Department said Friday it had issued a presidential permit authorizing TransCanada to construct, connect, operate and maintain the project — a decision TransCanada President Russ Girling called “a significant milestone.”

The decision reverses former President Barack Obama’s rejection of the $8 billion project in 2015, after a State Department review concluded Keystone XL did not serve the national interest. The pipeline is slated to carry as much as 830,000 barrels of oil per day from Alberta, Canada, crossing 1,897 kilometres and cutting through Montana and South Dakota on its way to Steele City, Nebraska. From there it will join a southern leg that flows to Gulf Coast refineries.

Keystone has long been a flash point for fossil-fuel opponents who argue it will encourage the development of Canadian oil sands crude, which generally requires more energy to extract and process. Landowners also say it endangers drinking water resources in America’s heartland.

Those same opponents who chained themselves to bulldozers, rallied at the White House and forced route revisions in Nebraska now are plotting a multipronged legal attack as well as protests in the pipeline’s path. 

Oil Sands and the Environment

Sara Shor, a campaign manager for the climate advocacy group 350.org, vowed to “raise hell at the national level” and recruit millions of people to fight the project, including by highlighting their concerns during lawmakers’ town halls during a planned congressional recess next month.

“We’re going to continue to make Keystone XL a political issue and push every elected official to come out against this project if they care about communities, local rights, eminent domain, air, water and climate,” Shor said by phone. “It just touches so many issues.”

Environmental groups are slated to file at least one legal challenge right away — arguing that the State Department violated the National Environmental Policy Act by approving Keystone on the basis of a three-year-old analysis of the project that was issued when oil prices were nearly double what they are now.

West Texas Intermediate crude oil, the U.S. benchmark, traded near $100 a barrel when the State Department’s final environmental study was issued in January 2014 but has slumped by roughly half, now hovering near $50 a barrel. That comes after a prolonged rout that sent crude plummeting to nearly $26 in 2016.

Prior story: Trump Pins Keystone, Dakota Pipeline Fate on Renegotiation

“The oil market has shifted and will always be shifting, and it’s really not adequate to rely on old analysis to approve this pipeline,” said David Turnbull, campaigns director with Oil Change International.

That earlier analysis was built around assumptions about prices and the availability of rail transport and alternatives for moving Canadian oil sands crude that have not come to pass, Swift said.

“The weaknesses of an approval at this stage and the legal vulnerabilities of that approval are apparent,” Swift said by phone. “Moving forward solely on the basis of an objectively outdated environmental review on a pipeline that doesn’t have a full route does pose a lot of problem for the legality of the approval.”

Energized Landowners

Other legal challenges will play out in Nebraska, where energized landowners have already forced changes to the project during previous reviews. At least 40 groups or individuals have filed intervenor applications with the state’s Public Service Commission ahead of a March 22 deadline, seeking to participate in the review. At least one of the petitions came from a law firm representing 92 people. All of them are subject to review and approval by the hearing officer assigned to the case.

TransCanada submitted an application to the commission last month, triggering a 210-day period for the agency to decide whether the company demonstrated the project serves the public interest. That points to a decision in September — if the Public Service Commission’s review is not extended for an additional five months.

If TransCanada wins state approvals and invokes eminent domain to claim land for pipeline construction, the activist group Bold Alliance will file a lawsuit challenging the action, said Jane Kleeb, president of the organization.

Separate challenges may play out in South Dakota, where opponents earlier this month asked a judge to reverse an authorization critical to its path through the state.

Sand Hills

All of the activity means that Keystone’s “best-case scenario for coming online” is the second half of 2019, Bloomberg Intelligence analysts said.

TransCanada is making its third attempt to carve a path across Nebraska. After the company encountered opposition from landowners with its initial proposed route, which sliced through the state’s environmentally sensitive Sand Hills region, lawmakers passed and then-Governor Dave Heineman signed legislation enabling him to work closely with TransCanada to chart a course for the project. Successive landowner legal challenges over the legality of that maneuver brought the project to a standstill. 

TransCanada eventually surrendered to a review by the commission instead of waging further court battles — shortly before Obama’s rejection.

All the concerns about land, water and using foreign steel remain, Kleeb said. “It’s going to be a long process — very much into the weeds,” Kleeb said in a phone interview, noting that “the courts are the only fair and viable path for us,” given Trump’s support for Keystone XL.

The Public Service Commission’s review will not encompass design and safety considerations, according the agency. Rather it will be limited to how it impacts the environment, including soil, plant life, groundwater and wildlife.

Legal opposition is already mounting. Attorneys David Domina and Brian Jorde, who led the fight previously, last month reiterated their view that there is no public use whatsoever for this private pipeline company’s project.

Changed Conditions

Opponents have argued that the economic backdrop has changed since TransCanada first pursued the project — and the numbers no longer work in its favor. Pipeline capacity from the Canadian oil sands is expanding, so producers have more options to send their crude to market. The Canadian government approved Kinder Morgan Inc.’s Trans Mountain line to the Pacific and Enbridge Inc.’s expansion of Line 3 to the U.S. Midwest. With the addition of Keystone, the combined capacity of 1.8 million barrels a day would be enough to handle Western Canada’s growing oil production for nearly two decades, according to National Energy Board oil projections.

TransCanada officials have said the company is committed to build a state-of-the-art pipeline system that will be monitored around the clock using satellite technology and aerial patrols. The company has stressed that pipelines are safer than trains for transporting crude and has vowed to work with all stakeholders in Nebraska.

Native Americans

Native Americans have battled the Dakota Access Pipeline in South Dakota and are set to reprise the activity against Keystone XL.

The activism will spill over into local debates over other pipelines proposed to ferry oil and natural gas across the country, Shor said. Her group, 350.org, is planning to “use Keystone to fight hundreds of other projects” nationwide. 

“People are going to be mad at Trump for bringing Keystone back because it’s going to cause resistance for every single pipeline project across the country and it’s going to cause pressure for the banks that fund all these projects,” Shor said. “We are building an army of resistance. This fight is not over. And we’re going to have to keep on fighting this for probably years to come.”

 

‘We are coming out of the bottom of the cycle’: Miners regain mojo to spark $24 billion in exploration hunt

A rebound in exploration by global miners could see spending hit C$24 billion by 2025 with China the front runner in the search for a new generation of giant discoveries.

Exploration budgets are rising after they plunged to an 11-year low of about C$13.3 billion last year as mining companies slashed costs in the wake of a collapse in prices, according to Richard Schodde, managing director of Melbourne-based MinEx Consulting Pty, an industry adviser.

“We are coming out of the bottom of the cycle. I actually see the opportunity for the exploration sector to regain its mojo and quickly deliver a pipeline of good discoveries,” Schodde said in an e-mailed response to questions. “It’s catch-up time for the industry.”

China, the top spender on exploration, is likely to continue to dominate in the hunt for new deposits, while Canada and Ecuador are currently among hot targets for more investment by miners, according to Schodde. The U.S. could be poised for a rise in exploration with President Donald Trump regarded as likely to be more favorable toward resource development, S&P Global Market Intelligence said in a report published in January.

Discoveries of so-called tier one projects, deposits with a net present value of more than C$1.34 billion, have stalled. Only 12 were uncovered in the past decade compared to an average of two to three a year since 1950, according to MinEx. The average cost of finding a significant mineral deposit has tripled in the last 10 years to about C$318 million, the consultancy said in a March 6 presentation.

China, the target of more than a quarter of global exploration spending in 2016, is yet to reap major rewards. An estimated C$56 billion spent on the nation’s hunt for new mines since 2007 has seen only two large discoveries announced and found a total slate of projects worth about C$17 billion, according to MinEx. Global exploration budgets peaked in 2012 at $33 billion, the data show.

Rio Tinto Group, the world’s second-largest miner, terminated a joint project to hunt for copper in China, its partner and largest shareholder Aluminum Corp. of China said in January. Rio increased spending on drilling in 2016 even as its overall exploration and evaluation budget declined, and as it cut the number of countries on its target list, Steve McIntosh, the executive in charge of exploration, told investors at a Dec. 6 seminar in London.

Spending on exploration in the mineral and energy sectors in Australia, the biggest exporter of iron ore and coking coal, slumped 40 percent to A$3.2 billion (C$3.34 billion) in the year to June 30, the largest ever decline, according to the nation’s government.

Volatility in commodities prices has led companies globally to focus on adding value to existing operations and to undertake greenfield programs in less risky locations, S&P said in January. Budgets among the largest miners will rise slightly this year, the ratings’ company said in a separate report this month.

BHP Billiton Ltd., the world’s biggest miner, is raising spending on exploration, focusing on copper and conventional petroleum, according to a June presentation by head of geoscience Laura Tyler. Newcrest Mining Ltd., Australia’s largest gold producer, lifted its budget by 15 percent in the six months to Dec. 31 and expanded a portfolio of projects, it said last month.

Melbourne-based BHP advanced 0.4 percent to 1,260.5 pence by 8:43 a.m. in London trading on Friday, as Rio rose 0.8 percent.

Better Returns

Returns on exploration spending were eroded by profligacy during a commodities price boom through to 2012 as miners funded work on marginal prospects and drove up costs of drill rigs to geologists, according to Minex’s Schodde. New efforts to raise expenditure are likely to prove more successful, with costs now lower and funding set to be directed first to higher quality projects, he said.

Explorers are being lured to move into Ecuador by discoveries made by Brisbane-based SolGold Plc as well as into the Canadian Arctic by Goldcorp Inc.’s Coffee gold project and into Saskatchewan following NexGen Energy Ltd.’s Arrow uranium discovery, he said. Goldcorp, which won the Coffee asset with the acquisition last year of explorer Kaminak Gold Corp., said in November the gold sector faces a decade-long output slump without the development of new mines.

“What would really propel the market forward would be a giant discovery, as the sizzle from this would encourage other companies,” Schodde said.

One of Canada’s biggest stock managers says bond spike no threat

The head of one of Canada’s biggest equity funds says the bull market in stocks has room to run because dividend yields will remain attractive even if bond yields move higher.

Martin Downie, manager of the C$17.2-billion Investors Dividend Fund, said there’s a persuasive case to be made for investing in stocks, even as the rise in bond yields provides an alternative for income-seeking investors. The fund jostles with the RBC Dividend Fund for title of the biggest Canadian mutual fund, according to data compiled by Bloomberg.

“Stocks are still very compelling even with the backup in interest rates,” Downie, 55, said in an interview at Bloomberg’s Toronto office. Ten-year Canadian government bonds yield about 1.7 percent, compared with the 2.7 percent dividend yield on the S&P/TSX Composite Index., Canada’s main equity gauge. That one-percentage point gap is about three times more than the average over the past decade, Bloomberg data show.

Downie said he wouldn’t be surprised to see a short-term pullback in stocks, but he forecasts longer-term annual returns of 6 percent to 7 percent even if the yield on the 10-year U.S. Treasury note rises above 3 percent. It was quoted at 2.4 percent at 4 p.m. on Thursday.

“That will be quite a bit better than bonds,” he said. “We’re not looking to shoot out the lights but we do think we’re in a secular bull market.”

The S&P/TSX is among the worst-performing stock markets in the developed world this year but Downie, who also manages Investors Group’s Canadian Large Cap Value Fund, said that means there’s bargains to be found north of the border, even if the U.S. has a stronger economic outlook.

“If I was shifting assets, I would be shifting probably a little bit more towards Canada because of the opportunities,” Downie said. “I would still be overweight the U.S., but that preference has migrated a bit more towards Canada.”

Stocks Sink

The S&P/TSX briefly slipped into negative territory for the year on Wednesday. Since its high on Feb. 21, the Canadian index has lost 3.1 percent due in part to a 12 percent decline in the price of oil over the same period.

Downie isn’t worried about falling oil prices — two of his top 10 holdings are pipeline companies TransCanada Corp. and Enbridge Inc., both of which have carried out multi-billion acquisitions in the U.S. giving them more exposure to the stronger U.S. dollar.

He describes himself as a bottom-up stock picker who looks for high-quality stocks that trade at a discount to their intrinsic value. He has been trimming banks from his dividend fund because he sees them as fully valued, although they’re still a core part of the portfolio. As of Dec. 31, Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal made up three of the four holdings in the Investors Dividend Fund.

The dividend fund, which is part of Winnipeg-based IGM Financial Inc.’s group funds, has returned 14 percent over the past 12 months, compared with 17 percent for the S&P/TSX, according to Bloomberg data. IGM Financial is majority owned by Power Corp. of Canada, part of the Montreal-based Desmarais family empire.

Downie, who manages C$22.1 billion in total, won’t disclose what individual stocks he likes now except to say that he’s looking at opportunities among industrials and consumer staples and is staying away from materials on the belief commodities are in a secular bear market.