Budget day: Who wins and who loses

No one wins and you are likely to lose

The Trudeau Liberals present their 2024 budget today as Crystia Freeland carries water for Trudeau, puts on new shoes, and tries to put lipstick on a pig. The legacy of reckless spending, excess borrowing and inane energy policies have brought Canada to the brink of economic crisis and this budget will push the country closer to the edge of the cliff if not tip it into the abyss.

With election only a year and half away, this budget will try to attract voter support for the left and will include the usual leftist rhetoric. Expect higher taxes on wealthy Canadians, more inflationary spending, a possible estate tax and a “windfall profits tax” on energy companies, a favorite whipping boy of the Trudeau Liberals.

I have no doubt Freeland will describe oil company profits as a “windfall” from higher commodity prices. She won’t tell Canadians that today’s oil prices, adjusted for the inflation leftist policies have fueled, are at four decade lows of less than US$30 a barrel, below the oil price that prevailed in 1981. Sure, there were a few years of somewhat higher prices in 2008-2015 but those days are long gone.

The “tax the rich” mantra will just see less money flow into the capital formation Canada needs to reverse its declining productivity and highly educated and high income Canadians leave Canada for a more tax-hospitable regime south of the border. My brilliant son James graduated in Computer Science from Waterloo over twenty years ago, moved to Texas, and began a career in the technology industry including stints with Amazon.com, Google, Trilogy (a software company) and today as Executive Vice President, Enterprise Data of Capital One. Along the way, he completed a Master’s Degree in Business at MIT and spent a year or so as an associate at McKinsey & Company, Inc. A more favorable business environment, a more taxpayer friendly tax regime, and a burgeoning technology industry made American a more hospitable environment than Canada. My youngest son Jeff, a graduate of University of Toronto in Computer Science, works in artificial intelligence for a Philadelphia firm.

Trudeau policies will acclerate the brain drain from Canada.

The budget is rumoured to include a “windfall profits tax” for energy companies whose “windfall” is commodity prices lower than in 1981. Investors need to pay attention anyway, since the most profitable Canadian oil & gas companies will suffer a minor setback. The companies most exposed are:

Suncor, which paid $2.3 billion in taxes in 2023 leaving it with $8.3 billion in net income, a respectable 20% return on common equity. I would not be surprised at an increased tax burden taking $1 billion from Suncor.

Canadian Natural Resources, which paid $1.9 billion in taxes in 2023 leaving it with $8.2 billion of net income, and a 21% return on common equity. CNQ may be tapped with another $1 billion of taxes.

Imperial Oil, which paid $1.5 billion in taxes in 2023 leaving it with net income of $4.9 billion, and a 22% return on common equity. IMO may suffer a $500 million tax increase.

TC Energy, Enbridge, Altagas, and Pembina may experience higher tax rates but will pass those on in higher tolls and ordinary consumers will pay those taxes, with the Liberals pretending they are being paid by the corporate taxpayers.

Net, net Ottawa may be able to generate about $2.5 to $3 billion in additonal taxes through its nonsensical “windfall profits tax”, the end result of which will be a flight of capital, higher costs to consumers, and a beaming smile on the face of Rolex wearing Jagmeet Singh who thinks this will attract more votes to keep him in office post 2025.

Trudeau and Singh are toast in 2025, incapable of leading Canada out of the morass of terrible policies enacted under Trudeau with NDP support, and new Prime Minister Pierre Poilievre will reverse the stupidity, so don’t fret the outcome. But wise investors realize that retail investors over react to negative news and believe persistent damage results from temporary setbacks, and the prices of Suncor, CNQ and Imperial Oil are likely to take a dip on Wednesday post-budget.

Like most of the Trudeau policies, tomorrow’s budget will add to the deficit, increase Canada’s unsustainable national debt, fuel inflation, and delay any potential reduction in interest rates by the Bank of Canada.

I hold none of three stocks I see as most at risk, but will nonetheless buy some very short term “in the money” puts on each of these three companies to hedge against an emotional sell-off in oil company equities in the wake of Liberal stupidity.