October 2024 Financial Market Update for Family-Owned Enterprises in Canada

As we progress through October, the economic landscape remains dynamic, shaped by significant cross-border shifts following the U.S. election and local fiscal trends that Canadian family-owned enterprises must navigate. From U.S. tax policy adjustments to currency pressures and evolving trade dynamics, Canadian family enterprises face both opportunities and challenges that call for strategic planning.

Overview of Current Economic Conditions

Canadian Economic Slowdown Canada’s economic growth has slowed markedly, particularly in comparison to the United States. The Canadian economy is expected to grow by just 1% in the latter half of 2024, while the U.S. boasts a robust 3% growth rate (BMO Special Report, 2024; Andersen Canada Report, 2024). This divergence in growth rates is due to a mix of economic factors, including weaker consumer spending, high household debt, and a softening manufacturing sector. For Canadian family-owned businesses, this slower growth translates to lower consumer demand, impacting revenue generation and market expansion prospects.

Weakness in Key Sectors Manufacturing remains under pressure, with sectors such as machinery, automotive, and transportation equipment facing diminished demand. Steel and aluminum—critical for Canada’s exports—are also feeling the effects of U.S. tariffs, which have added financial strain and impacted Canadian competitiveness in these sectors (Andersen Canada Report, 2024). This context poses challenges for family-owned enterprises in manufacturing or supply chain-dependent businesses, making it crucial to explore diversification or efficiency measures to maintain resilience.

U.S. Election Impact on Canada’s Economy

Tax Policy Shifts and Competitive Implications The recent U.S. election has set the stage for potential tax policy shifts, notably the anticipated cut in the U.S. corporate tax rate from 21% to 15%. This could intensify competitive pressures on Canadian businesses, given Canada’s relatively high corporate tax rates (with top rates reaching 38%). Canadian family-owned enterprises may find it harder to compete for North American market share, and some may consider expanding operations in the U.S. to capitalize on tax advantages (BMO Special Report, 2024; Andersen Canada Report, 2024).

Currency and Trade Pressures

Canadian Dollar Depreciation The Canadian dollar has depreciated significantly, hovering around 71 cents USD and potentially falling below 70 cents by the end of 2024. This trend stems from Canada’s sluggish growth and anticipated rate cuts by the Bank of Canada, contrasting with a more cautious stance by the U.S. Federal Reserve (Andersen Canada Report, 2024). For family-owned exporters, the weaker CAD presents a competitive edge by making Canadian products more affordable for international buyers, particularly in the U.S. However, for those reliant on imports, rising costs could erode profit margins.

Trade and Tariff Challenges The U.S. administration has proposed a universal 10% tariff on all imports, with no clear exemption for Canada. This policy shift raises the cost of exporting to the U.S., a major market for Canadian goods. Key sectors, including auto, steel, and agriculture, could face increased challenges, requiring family-owned enterprises to consider alternative markets or adjust pricing strategies to protect their market share. Import substitution—sourcing from Canadian suppliers—can be a strategic response to mitigate the impacts of trade duties and reduce dependency on U.S.-sourced goods.

Strategic Tax and Financial Planning Amid Economic Volatility

Tax-Efficient Investment Structures Given the current economic uncertainties, establishing tax-efficient structures is essential for maximizing returns and minimizing tax burdens. Family-owned businesses can benefit from holding companies, which allow income accumulation and deferral, as well as family trusts, which enable income splitting to reduce the overall tax burden. Structuring assets through holding companies and trusts also provides a strategic foundation for wealth transfer and estate planning, preserving family wealth across generations.

Income Deferral and Tax Optimization In light of potential cross-border tax impacts, income deferral becomes an effective strategy to manage liabilities. Deferring income through retained earnings, reinvestment in growth assets, or deferred compensation arrangements can reduce tax exposure, allowing businesses to reinvest in growth initiatives. For Canadian family-owned enterprises with U.S. operations, optimizing cross-border tax strategies is essential to avoid double taxation and benefit from treaty provisions that allow for tax credits on foreign income.

Monitoring U.S. Policy Changes The economic implications of U.S. policy adjustments, particularly tax rate changes and trade tariffs, underscore the importance of staying informed. Family-owned businesses should monitor developments and work closely with tax professionals to adapt quickly to policy shifts, ensuring compliance and optimizing tax efficiency. Consulting with cross-border tax experts can provide valuable guidance on structuring U.S. transactions and managing cross-border obligations to minimize tax liabilities.

Outlook and Strategic Recommendations

1. Leverage Export Opportunities For Canadian family-owned businesses involved in exports, the weaker CAD provides an immediate advantage in terms of pricing competitiveness in foreign markets. However, balancing this advantage with import cost challenges will be essential, especially for businesses sourcing from U.S. suppliers. Establishing local supplier networks or hedging against currency fluctuations can help mitigate cost pressures associated with a weaker Canadian dollar.
2. Diversify Market Focus Exploring alternative markets outside the U.S., such as Europe or Asia, can reduce dependency on American demand and build more resilient revenue streams. Trade agreements like the Comprehensive Economic and Trade Agreement (CETA) with the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) offer Canadian businesses duty-free access to new markets, which can be particularly valuable for family enterprises in agriculture, manufacturing, and technology sectors.
3. Reevaluate Real Estate and Investment Portfolios With the Canadian housing market expected to rebound in 2025 due to lower interest rates, family-owned real estate enterprises may find opportunities for investment growth. Additionally, a weaker CAD and potential foreign interest could increase property values in certain regions. However, businesses must carefully manage costs associated with construction or property development, particularly if reliant on imported materials. Holding companies can be advantageous for structuring real estate investments to optimize tax efficiency.
4. Adopt Proactive Cost Management For sectors impacted by tariffs and currency fluctuations, proactive cost management becomes essential. Implementing efficiencies in operations, negotiating long-term supplier contracts, or even exploring import substitution can help offset rising costs. Family-owned enterprises should also consider flexible pricing strategies to respond to inflationary pressures without compromising customer retention.
5. Collaborate with Financial and Tax Advisors The evolving economic and regulatory landscape highlights the value of working with specialized advisors who understand cross-border complexities. For family-owned enterprises, aligning with tax and financial experts can provide critical insights for navigating both U.S. and Canadian tax obligations, implementing efficient wealth structures, and securing long-term stability. This proactive approach to planning supports financial resilience and positions businesses to adapt successfully to ongoing market changes.

Conclusion

As economic uncertainties persist and the impacts of U.S. policy changes become clearer, Canadian family-owned enterprises must prioritize strategic planning to stay competitive. From leveraging tax-efficient structures and managing currency risks to diversifying export markets, adopting a proactive approach will be crucial for resilience. For specialized guidance on navigating these challenges, Shajani CPA is committed to supporting family-owned businesses with tailored tax and financial planning. Tell us your ambitions, and we will guide you there.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

Trusts – Estate Planning – Tax Advisory – Tax Law – T2200 – T5108 – Audit Shield – Corporate Tax – Personal Tax – CRA – CPA Alberta – Russell Bedford – Income Tax – Family Owned Business – Alberta Business – Expenses – Audits – Reviews – Compilations – Mergers – Acquisitions – Cash Flow Management – QuickBooks – Ai Accounting – Automation – Startups – Litigation Support – International Tax – US Tax – Business Succession Planning – Business Purchase – Sale of Business