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Canada’s Financial Freefall: When Rosy Rhetoric Meets Hard Reality

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This article is from The Opposition With Dan Knight substack.  

The Trudeau Government’s Economic Alchemy: Turning Gold Hopes Into Lead Numbers

Good morning, my fellow Canadians. It’s September 3, 2023, and if you’re expecting to wake up to a bright, financially secure Canada, well, I have some sobering news for you. The latest figures from Statistics Canada are in, and they confirm what many of us have suspected: the Canadian economy is not on the up-and-up. Despite the rosy pictures painted by Prime Minister Justin Trudeau and Finance Minster Chrystia Freeland, the real numbers don’t lie, and they point to an economic landscape in turmoil. Allow me to break it down for you.

The new Statistics Canada data is in, and it paints a rather bleak picture of the Canadian economy under the watchful eyes of the federal government and Justin Trudeau. Let’s delve into some numbers, shall we? A staggering $16.5 billion in debt was added by Canadian households in the first quarter of this year alone, with $11.2 billion being in mortgage debt. In an environment of 5% interest rates, a rate we haven’t seen for over a decade, this is a financial bomb waiting to explode.

And let’s not forget inflation. Since 2021, we’ve seen a cumulative inflation rate of around 16.5%. Now, remember, these aren’t just abstract numbers on a ledger somewhere; these are realities hitting your grocery bills, your gas prices, your rents, and slowly emptying your wallets. But it’s not just households feeling the pinch. The economy as a whole is stalling, with real GDP nearly unchanged in the second quarter of 2023, following a measly 0.6% rise in the first quarter.

Amidst all this, Justin Trudeau and the federal government seem content piling on debt like there’s no tomorrow. The Parliamentary Budget Officer’s March 2023 report shows Canada’s deficit is expected to rise to $43.1 billion in 2023-24, up from $36.5 billion in 2022-23. And let’s not forget that 1 out of every 5 dollars in this debt spree didn’t even exist pre-pandemic. Essentially, we’re spending money we don’t have, to solve problems we’re not solving, all while making new ones.

So, where has all this spending gone? Not into securing a robust future for Canadians, I can tell you that. Despite the monumental deficits and the reckless spending, housing investment fell 2.1% in the second quarter,marking its fifth consecutive quarterly decrease. Canadians are struggling to make ends meet, and the government’s financial imprudence is exacerbating, not alleviating, the situation.

But here’s a twist to the story: while investments in housing decline, Justin Trudeau decided it was prime time to open the floodgates of immigration. There’s an aspect of governance called planning, something that seems foreign to this administration. How does one justify allowing over a million immigrants into Canada without even hinting at a solution for housing them? The result is basic economics – demand outstrips supply, and prices soar.

Remember the days before Trudeau’s reign, when the average home in Canada cost around $400,000? Eight years under his watch and that figure has doubled. Trudeau’s policies seem like a cruel jest to young families, professionals, and, frankly, anyone aspiring to own a piece of the Canadian dream. It’s almost as if he expected the housing market to “balance itself”.

And before you think this is just a ‘rough patch,’ let me remind you that household spending is also slowing. So not only are Canadians going into debt, but they’re also cutting back on spending. They’re being hit from both sides, and there’s no end in sight. The government’s promises of prosperity seem increasingly hollow when we see that per capita household spending has declined in three of the last four quarters.

The Trudeau administration’s approach to governing appears to be in a parallel universe, one where debt is limitless, and financial responsibilities are for the next government or even the next generation to sort out. And don’t even get me started on the higher taxes lurking around the corner to pay off this bonanza of spending. This isn’t governance; it’s financial negligence.

When Canadians were told that this level of inflationary spending could turn our country into something akin to Venezuela, many scoffed at the idea. But let’s face it: the signs are becoming hard to ignore. The truth is, many Canadians have been led to believe they can have gold-plated social services without paying an ounce of gold in taxes. Prime Minister Justin Trudeau seemed more than happy to sell that narrative. He promised a utopia, a social safety net woven from dreams and aspirations. But what has that net caught? Rising costs, crippling debt, and a harder life for everyday Canadians.

Trudeau has turned out to be less a responsible steward of the economy and more of a Pied Piper, leading us all off a fiscal cliff while playing a cheerful tune. Or perhaps he’s more like the Cheshire Cat from “Alice in Wonderland,” grinning broadly as he disappears, leaving behind only his grin and a trail of false promises.

As we approach the pivotal year of 2025, don’t forget who sold you this bill of goods. Remember the skyrocketing costs of living, the unmanageable debt, and the empty words that were supposed to make everything better. I, for one, certainly won’t forget. And I suspect, come election time, neither will you.

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The Digital Services Tax Q&A: “It was going to be complicated and messy”

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A tax expert on the departed Digital Services Tax, and the fiscal and policy holes it leaves behind

It’s fun, and fair, arguing whether Mark Carney “caved” in suspending the application of Canada’s Digital Services Tax to revive broader negotiations with the Trump administration. But I figure there are other dimensions to this issue besides tactics. So I got in touch with Allison Christians, a tax law professor at McGill University and the founding director of the Canadian Centre for Tax Policy.

In our talk, Christians discusses the policy landscape that led to the introduction of the DST; the pressure that contributed to its demise; and the ways other countries are addressing a central contradiction of the modern policy landscape: without some kind of digital tax, countries risk having to impose costs on their own digital industry that the overwhelmingly US-based multinationals can avoid.

I spoke to Christians on Friday. Her remarks are edited for length and clarity.


 

Paul Wells: I noticed in your social media that you express inordinate fondness for tax law.

Allison Christians: You will not find a more passionate adherent to the tax cult than me. Yes, I do. I love tax law. Of course I do. How could you not? How could you not love tax law?

PW: What’s to love about tax law?

Christians: Well, tax law is how we create our country. That’s how we build our society. That’s how we create the communities that we want to live in and the lifestyle that we want to share with our neighbours. That’s how: with tax law.

PW: I guess the goal [of tax policy] is to generate the largest amount of revenue with the smallest amount of grief? And to send social signals while you’re at it. Is that right?

Christians: I don’t think so. Tax is not about raising maximum revenue. Tax is about deciding what society you’re trying to build and what portions of that society need to be made public, and what can be left to private interests which then need to profit. So we have decided in Canada, as a country, that basic minimum healthcare cannot be a for-profit enterprise. It has to be a public enterprise in order to make sure that it works for everybody to a certain basic level. So tax is about making those decisions: are we going to privatize everything and everyone pays for their own health care, security, roads, insurance, fire department etc. And if they can’t pay, then too bad? Or are we going to have a certain minimum, and that minimum is going to be provided in a public way that harmonizes across the communities that we have. And that’s what tax is about. It’s not about extracting revenue at all. It’s about creating revenue. It’s about creating a market. It’s about investing in a community. So I just object to the whole idea that tax is about extracting something from me, because what tax is doing is creating a market for me to be able to thrive. Not just me, but all of my neighbours, as well.

PW: Let’s jump forward to the events of the past couple weeks. Were you surprised when the Prime Minister suspended the Digital Services Tax?

Christians: I think “surprise” is probably too strong of a word, because nothing any political leader does to cope with the volatility of the United States would surprise me. We are dealing with a major threat, a threat that is threatening to annex us, to take our resources, to take our sovereignty, to take our communities and rip them apart and turn them into a different way of being. And that’s a serious threat. So nothing would surprise me in response to that. Disappointed, of course. But not disappointed in our Canadian response. More disappointed in the juggernaut that Trump has been allowed to become by his base, and that they’re pulling the rug out from under everyone that’s cooperated with the US agenda for decades, including us.

PW: What’s your best understanding of what the Digital Services Tax was designed to accomplish? And is it unusual as taxes go?

Christians: So to understand this, you really have to be a policy wonk, which isn’t much fun. So I’m gonna give you an example that might make it clear from the perspective of Canada. Why we might have a Digital Service Tax or might want something like it.

I want to preface this by saying that the Digital Service Tax is by no means the only way to do the underlying things we want to accomplish. Certainly other countries have been collecting DSTs and have been collecting billions of dollars, and US companies have had reserves for paying that Digital Service Tax. So we just left money on the table. But let me try to explain why we want to do the thing without getting too “tax nerdy” on you.

So I’m sure you can come up with the one Canadian company that’s streaming content on television or on digital devices.

PWCrave?

Christians: Yeah, that’s the one. Crave is owned by Bell Media and is a Canadian company. And Crave pays taxes in Canada. Crave has to compete against Netflix, which does not have to pay tax in Canada. Netflix just simply doesn’t have to pay the same way that Crave does unless we force them to pay. Crave has to compete with US and foreign content streamers. We may get to a point where we can get Netflix to collect some sales tax on the GST, for example. But if Netflix itself stays out of Canada, physically, but it’s still getting all those customers that otherwise Crave would have access to, then Crave is at a structural disadvantage.

Now tell me which Canadian provider competes with Google.

PW: I can’t think of one.

Christians: Exactly. There isn’t one. How are we supposed to get a homegrown competitor when our competition simply does not pay taxes, and any one we would grow here in Canada has to pay tax here? So we have to understand the Digital Service Tax as simply our response to the fact that we normally do not tax a company unless they are physically located in Canada. But now we’ve got to go into this digital space and say: you’re still here, even if we can’t see you and talk to you, you’re still here. You’re doing something in our market. And that’s what the Digital Service Tax was trying to deal with.

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PW: Now, how are companies likely to respond to this Digital Services Tax? It seems to me the likeliest outcome would be that they would pass those costs on to their customers.

Christians: Yes, that is what companies have said they would do. Google talked about passing those costs on to the customers. And their customers obviously are advertisers. I want to point out that advertisers in Canada used to advertise in local newspapers and media. Now they advertise on Facebook, owned by an American-headquartered Company, Meta. Right now, they advertise on those foreign platforms, so we don’t have those advertising dollars here. Advertisers might have had to pay the Digital Service Tax if Google, or whoever, had passed it on to them. I think it’s fair to say, that Canadians advertising on those foreign platforms would have faced a gross-up to cover that tax.

PW: So, the net effect is that it just becomes more expensive for Canadian consumers. I’ve seen it argued that all this tax would have succeeded in doing is making Netflix more expensive.

Christians: Okay, that’s possible. I mean, that assumes the supply is totally elastic: you can increase the price of Netflix, and people will still pay it indefinitely. Right? So that’s the assumption in the short term. But the long-term assumption is that Crave becomes more competitive — because its competitors are paying the same tax that it is paying. The Crave subscription price may or may not respond, but if you put pressure on the foreign service providers in the same manner that’s on the Canadian providers, it might cost more, but we’re also getting the tax.

PW: I believe the Prime Minister, in an interview with the CBC said that he was thinking of getting rid of this thing, anyway. [The quote I’m reaching for here is: “Look, what we did this week is something that I think we were going to do anyways, in the end, for the deal.” At 1:07 in this video. — pw] Why do you think he would have been leaning in that direction? And do you think that absent a Truth Social post by President Trump, he actually would have gotten rid of the thing?

Christians: I can’t speculate too much about the politics of this, because I’m not talking to many of the people that make policy, but I know the complaints about the DST, and I don’t dispute them. It was going to be a complicated tax to collect and it was going to be messy in terms of compliance. There’s a lot of uncertainty around the tax and I know there’s always an enormous amount of pressure to reduce all taxes. There’s always going to be that segment of society that sees taxes being thrown down the drain and not as an investment in the society that we want to live in.

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American companies are famous for investing their money on lobbying and not in taxes. They spend their money convincing us that it would be bad for us to tax them, and they can spend a much smaller percentage of their money on lobbying and get us to believe that narrative. And the narrative is that somehow, if we tax Google, Google will go away and we won’t be able to use it. That Google won’t innovate. It’s nonsense, but it’s a story that resonates nonetheless. Was Prime Minister Carney pressured to get rid of the DST? Undoubtedly. And maybe he personally thinks there’s a better way to tax these companies than with an excise tax. I don’t fault him for thinking that. I have even written that there are better ways for Canada to collect this tax than the Digital Services Tax.

PW: I’m going to want you to tell me about these other ways. But I assume that if a Canadian government attempts any of these other ways, then the companies we’re talking about know that all they have to do is hit the Trump button and the pressure will be right back on.

Christians: That’s correct. There are a couple of [alternatives to the DST]. We could, like some other countries have done, redefine the types of income that we subject to withholding taxes in Canada. It’s a complicated technical idea, but basically any payments that go from our advertisers to Google, we could impose a withholding tax simply by expanding a couple of definitions in the Income Tax Act that would then carry over into our treaty. Now, people will push back on that, and say that you’re changing a deal, and people will object to that. And we can have an argument about that, but that possibility exists. That withholding tax is the most straightforward way to do this and we should probably already be thinking about it.

Another one that’s kind of fun, which I really enjoyed learning about when I came to Canada, is Section 19 in the Income Tax Act. So, Canadian advertisers are paying Google now, instead of a Canadian newspaper. Well, Section 19 basically says that whenever someone makes a payment for advertising to a foreign, non-Canadian media, that payment’s not deductible.

Now that provision seems to violate Free Trade rules because it changes, depending on who you make the payment to. But it’s a provision in law. The US objected to it when we adopted it by imposing a reciprocal tax on US advertisers paying Canadian outlets, which doesn’t seem to bother anybody.

PW: But the application of that will be very asymmetrical, right?

Christians: Yes, for sure. And I’ll tell you what the Canadian media noticed when we started paying for digital newspapers online: that they’re not subject to Section 19 — only print and traditional media are subject to this denial of deduction — and Canadian media advocated for this denial of deduction for online publications as well.

All you have to do is look at the wording of Section 19 — and you don’t even have to change the words — and all of a sudden all those payments to Google are not deductible. But if the payments were to Crave, they would be deductible, and if they are to the Globe and Mail, or other Canadian companies, they would be deductible. That is a different kind of advantage for the Canadian competitor that’s a little less susceptible to Trump’s understanding, and a little less susceptible to the politics that surround the Digital Services Tax. But it’s technical. You have to explain it to people, and they don’t believe you. It’s hard to understand it.

PW: Theoretically a two-time central-bank governor could wrap his head around it.

Christians: Yes, I think he could fully understand it, for sure. You’re absolutely right. Will he want to do it, though? I just don’t know.

PW: You said that there are other jurisdictions that continue, today, to successfully tax the web giants. Who are you thinking of?

Christians: Well, Austria’s been doing the Digital Service Tax since the beginning. The UK has the Diverted Profits Tax that they’ve been using. Australia has one that’s been enforced. Austria stands out because I think it was 2017, in Trump’s 1st term, and it was part of a group that Trump threatened to retaliate against, but they just quietly kept going and they’re still collecting it. Part of the narrative is that we, Canada, came too late to the DST party. We just weren’t part of that initial negotiation. We came in too late, and then it was too obvious, and people were able to isolate us from the pack.

PW: My understanding is we’re looking at a hypothetical $7.2 billion in revenue over 5 years. And that represents a shortfall that’s going to have to be found either in other revenue sources or in spending cuts, or in greater debt. Aside from the DST, do you think Canada could use a general overhaul of its tax code?

Christians: Always. Yes, absolutely! Taxes are funny, right? Because they come into every single political battle, and what ends up happening is that politicians treat the Tax Act and the tax system as a present-giving machinery, and not as a clear policy deliverance system.

I am, every day, surprised at how complicated the Canadian tax system is. It’s way too complicated. You can’t even fill out your own tax return in this country. You’re going to make mistakes because it’s just too ridiculously written. It’s too confusing. It’s too messy. So it’s time to take another look. But you need a commission [like the 1962 Carter royal commission on taxation]. You need to be bipartisan. You need to spend money on that. You need to think that the things that you do have long-term effects, and this takes political courage. And basically it requires upsetting a bunch of people and resetting things, and we just might not be at the right time politically to be doing that because people feel vulnerable to volatility from abroad. So it may not be the time to push that.

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International

Elon Musk forms America Party after split with Trump

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Quick Hit:

Elon Musk announced Saturday he is forming the “America Party,” claiming it will challenge what he calls the “one-party system” in Washington. The move follows his public split with President Trump and appears aimed at targeting Republicans who supported the president’s domestic agenda.

Key Details:

  • Musk announced the America Party on X, declaring that Americans are living under a “one-party system” and need a new political alternative.
  • The launch followed his criticism of Trump’s One Big Beautiful Bill.
  • On Independence Day, Musk posted a poll asking if Americans wanted “independence from the two-party (some would say uniparty) system,” which he cited as support for forming the party.

Diving Deeper:

Elon Musk formally announced the launch of his new political outfit — the “America Party” — on Saturday, marking a new chapter in his increasingly public clash with Republican leadership.

“When it comes to bankrupting our country with waste & graft, we live in a one-party system, not a democracy,” Musk wrote on his platform, X. “Today, the America Party is formed to give you back your freedom.”

The announcement comes as tensions between Musk and President Trump have escalated. While Musk previously worked closely with the administration as head of the Department of Government Efficiency, the relationship has deteriorated in the wake of Trump’s push for the One Big Beautiful Bill, a major domestic package that Musk now openly criticizes.

In a series of recent posts, Musk vowed to help primary Republican lawmakers who backed the bill. “They will lose their primary next year if it is the last thing I do on this Earth,” he posted earlier this week.

He’s offered few specifics beyond that, other than suggesting the party will “laser-focus” on a handful of Senate and House races in 2026. So far, there’s been no indication of a formal party structure, candidate recruitment, or funding plan.

Critics were quick to compare Musk’s move to Ross Perot’s 1992 presidential bid, which many credit with splitting the conservative vote and aiding Bill Clinton’s election. “You are pulling a Ross Perot, and I don’t like it,” one user reportedly responded on X.

Meanwhile, Trump has reportedly explored options to retaliate. According to multiple reports, the president has discussed whether to revoke federal contracts connected to Musk’s companies and even floated questions about his citizenship. “We’ll have to take a look,” Trump told reporters when asked directly.

While it’s too early to tell whether the America Party will amount to more than a personal platform, the political message is clear: Musk is now openly working against Republicans he once aligned with, and doing so under his own banner.

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