Tariffs Bring Worries, Resilience Indicators: Tax and Financial Pros

Evelyn Jacks, Geoff Currier

The tariff wars have begun along with early market reactions. How will this new environment affect your clients’ employment, investment, business and retirement plans? 

Close to 1700 financial pros weighed in on last month’s Knowledge Bureau Poll – an important sampling. Moreover, reaction from the federal and provincial governments, from the private sector economists, and the CFIB underscore the seriousness of the issues.

  But there may also be brighter horizons:  research shows that small and medium sized business are already poising to pivot, especially with accelerated tax relief and deferrals and a removal of inter-provincial trade barriers as defensive actions.   In this Special Report, learn more:

The Initial Shocks.   Recessions, damage to the Canadian dollar and unemployment loom should the tariffs linger, according to some of Canada’s chief economic thinkers.   Analysis by Frances Donald, senior vice president & chief economist at Royal Bank of Canada, in an interview for Morningstar, paints a sombre picture:  “A persistent tariff of this magnitude is recessionary for Canada. If sustained, our initial analysis suggests that tariffs of this size (based on many assumptions) could wipe out Canadian growth for up to three years, with the largest impacts in the first and second years. . . Our estimates align to the Bank of Canada’s findings which simulate that a 25% increase in tariffs across the board (US and global) would reduce Canadian GDP ranging from -3.4 to -4.2 percentage points. Such reductions could push Canadian unemployment rates up by between 2 to 3 percentage points.”

The Employment Statistics:  The annual federal government study entitled Key Small Business Statistics, underscores that exports are vital to our economy.  They drive economic growth especially from the proliferation of small businesses (1-99 employees) and medium sized businesses (100-499 employees), which hire the majority of workers in Canada too.  Together they are known as SMEs.

Specifically, in 2022, private sector businesses employed 12.2 million people in Canada. In total, SMEs employed 63.8% of the private sector workforce (7.8 million individuals).  Most of these employees, 46.8% (5.7 million), worked for small businesses, compared with 36.0% (4.4 million) for large businesses and 17.0% (2.1 million) for medium-sized businesses.

With retaliatory tariffs, the Bank of Canada expects an export drop of over 8% as Canadian goods become more expensive.  The value of the dollar may provide some relief.  But exporters could respond by cutting production and hiring; as well as layoffs, particularly in some industry sectors – energy, auto, construction, agriculture and manufacturing for example.  

The Exporters.  Consider these factors from the study on the number of exporters in Canada:

• A total of 48,036 Canadian enterprises exported goods, the vast majority of which were SMEs (72.9%).
• In 2022, Canada's exports of goods totalled $717.6 billion, of which 40.8% was attributable to SMEs
• Among the 10 main destinations for exports of Canadian goods in 2022, the highest contribution attributable to SMEs to the total value of goods exported came from exports to the United Kingdom; the second-leading destination for goods produced by small businesses was China, followed by Japan.

The Key Worries.  Is Canada’s proliferation of small business better positioned to weather the economic fall out, in the short term at least?  Possibly.

However, while government of Canada statistics would seem to suggest that the dependence on exporting to the US is of less significance for SMEs, the CFIB recently conducted a survey of over 2000 of its small business members on the issue of the tariffs.  Here is what they found:

•  More than one in four trading businesses make over half of their goods purchases from U.S. suppliers. Businesses are copying by looking for new suppliers, scaling back their expansion plans and reducing staff. 41% of importers believe they can pivot within six months.
• However, one in three survey respondents said they generate over half of their sales in the U.S. and 51% of exporters expect it will take much longer to adapt to new markets and stabilize their operations.
• Over half of businesses report being unprepared to manage the impact of new tariffs. Many face financial strain, operational uncertainty, and difficult decisions about the future. 

The Interprovincial Effects.

The Opinion Poll.  Knowledge Bureau readers were thoughtful in their approach to the question of whether the tariffs will directly affect their clients’ economic future.  A solid 66% said yes. Some comments:

• Gaetan Ladouceur commented:  “That is a tough question, as via my own observation and understanding, it looks like Trump enjoys to ‘taunt’ the world about his perceived presidential power.  No one really wins in a tariff war.  It creates unnecessary inflation due to a reduction of supply and increase prices and with retaliatory measures (dollar for dollar), everybody suffers except the very wealthy.  And yes, it could impact the financial decisions we make in the future, but I have found that people are creative when it comes to their own financial management and be able to significantly reduce the negative impact of imposed tariffs.”
• From Robert Litschel:  “In the short term, if the tariffs do come in, it will affect my clients due to increased pricing and, potentially, a weaker Canadian dollar.  I am not sure of the long term effects as that will depend on how long the tariffs are around and what kind of agreements can be reached with the US.”
• From Carla Gibson:  “I believe Trudeau’s plan and reactions to all these tariff’s will though.”

What to do Next.  The CFIB survey noted that their members are looking for government to help in three specific ways.  Top of the list is tax relief, then buy-local programs, and the removal of interprovincial trade barriers.

Tax and financial advisors can help immediately by advising clients of the top ways to reduce taxes owing for the 2024 tax year and mitigate tax instalment and statutory deductions as well.  During job loss or interruption, assess income sources and timing – when is the money needed?  Where will it come from?  What is the most tax efficient investment to tap to shore up cash flow gaps?  The TFSA would be a logical good first choice

For Businesses, what are potential new revenue streams, grants and financing opportunities to discuss?  Are there tax deferrals to take advantage of?  How can people stay employed when bottom lines shrink? Will falling interest rates help with operating line costs?  Note that the capital gains inclusion rate hike deferral to January 1, 2026 has provided a welcome window to generate a larger capital dividend account at advantageous tax costs. 

For investors, it’s back to basics:  tax advantaged investing and dollar cost averaging, how to stay invested and diversified and on plan are important discussion points. 

For retirees, there may be some silver linings:  an opportunity to generate sales of American real estate with a relatively high US Dollar return  while capital gains inclusion rates remain at 50% levels.

There is much more to consider.  We thank readers for their response and invite you to an important Meeting of the Minds discussion on these issues on March 6.  How to register for this free event: 

REGISTER HERE

Please weigh in on this month’s poll question: 

“In your view, has CRA improved its services to clients and tax preparers this year?”

CAST YOUR VOTE

Readers may also be interested in:

Canada’s Income Tax Fundamentals Course

RWM Designation Program