Serious money

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By now you should have brimmed your tax-free account with that sexed-up contribution amount. On Tuesday evening, shortly after the federal budget was dropped, this pathetically prescient blog told you to go forth and multiple when the sun rose. Now that you are allowed to plunk down ten grand for 2015, we said, you should do so. Like, immediately.

Lots of people didn’t because they were afraid. The media piled on. So did opposition MPs, some of whom were vexed about the increase itself. The banks wussed out. It took more than three days for reality to dawn on people that it was all perfectly legal.

For the record, when a federal finance minister stands to deliver a budget, which is immediately followed by the tabling of a Ways and Means motion, the sucker’s done. It has the force of law. The reasoning is simple – if governments gave advance notice of specific tax changes then people would scurry around and find ways to thwart them. Se because every citizen must be treated equally (except if you’re in the Senate. Or are Justin Beiber) when the finance minister says something, it is effective that moment.

My advice, of course (as always) was correct. So on Friday the government took the unusual step of actually spelling it out in crayon. “The Canada Revenue Agency (CRA) is allowing individuals to immediately benefit from the proposed increase to the Tax-Free Savings Account (TFSA) annual contribution limit announced in Economic Action Plan 2015,” it said. “Canadians can immediately start contributing to their TFSA up to the proposed $10,000 annual contribution limit. This proposed measure is subject to parliamentary approval. Consistent with its standard practice, the CRA is administering this measure on the basis of the Budget announcement. Financial institutions may immediately allow existing and new account holders to contribute up to the proposed maximum.”

So there ya go. Dig in.

Now, here’s an oft-asked question: if the TFSA is beefed up like this, should I cash in an RRSP to contribute to it? The answer is a clear maybe. If you’re in school, on mat leave, have your ass fired or are taking a sabbatical, then deregistering an RRSP and moving the money to a tax-free account can make great sense. You’ll be in a low tax bracket and so might pay little or nothing on the RRSP funds received. You can then move them into the TFSA, invest in cool stuff like equity ETFs, enjoy taxless growth, and have full access to the money when you wrinkle.

Just remember to take the money out of the RRSP in small amounts of $5,000 or less to keep the withholding tax at 10%. Except in Quebec, where you pay more (of course).

Another common question: my spouse stays home and looks after the kids and has no real income. Can I contribute money to his/her TFSA?

No, you can’t. But you can gift money to your significant other, and then he or she can make that contribution. The money you give will earn returns inside the TFSA, and none of those will be attributed back to you. So, obviously, this is a great way to shift income and increase the tax-free earning power of your partnership. With the new limit, a couple can sock away $82,000, and that will now increase by $20,000 a year.

Yes, this is starting to be serious money. If you max out today, put in the twenty grand for ten years and earn an investment return of 7%, a decade from now you’ll have $437,635, of which $155,635 is tax-free growth. Now imagine if you were 20 years from retirement and did the same. You’d have $1.14 million – which could generate about $79,000 a year in tax-free income without diminishing the principal, and none of that would be reportable. So, conceivably, millionaire couples could be collecting their full CPP and OAS benefits, have the taxable income of a golden retriever, and live a happy life. All because of the TFSA.

By the way, if you’re an old fart and have to convert your existing RRSP into an income-spewing RRIF (the minimum withdrawal amounts just fell), you can still contribute fully to a TFSA. So while the RRIF money needs to be included in your taxable income, you can just invest it inside the TFSA and continue to grow it – with the returns never to be taxed again. Unlike RRSP contributions, which end at 71 (unless you marry a young babe and do a spousal), the TFSA contributions are eternal.

Another question I hear: can I open TFSAs for my kids and load them up?

Same answer. No. But you can gift them the money and nothing will be attributed back to you for tax purposes. Kids with social insurance numbers who are full-time Canadian residents get to open a TFSA at age 18, unless they live in places where maturity is delayed, like BC. But even though they have to wait a year, annual contribution room of $10,000 starts accumulating in the year in which they turn 18.

Obviously having five TFSAs in a family with three over-18 kidults means you can take $50,000 a year in taxable investment assets and move them over into tax-free accounts. At that rate it won’t take long to shelter hundreds of thousands, which is exactly why anti-TFSA critics are beside themselves. This is the ultimate dodge, allowing families to turn fully-taxed investment portfolios into deep pools of money that can grow rapidly, attract no tax ever, provide non-reportable income and allow all government pogey.

You may have come here to read about real estate. But don’t dare blow this.

Mommy-to-Market

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Around this confused planet, people look at horny little Canada and shake their heads. The World Bank thinks we’re nuts. So does the International Monetary Fund. And The Economist, and US ratings agencies Fitch, Moody’s and S&P. Private and government-agency economists look at two or three ratios, and flip out.

But they have yet to discover the scariest numbers of all.

The standard measures of how insanely house-lusty a granite-humping and brick-licking nation ranks, include the house price-to-rent ratio, which shows if assets are overvalued compared to their investment value. Check that – tenants here are massively subsidized. Then there’s the price-to-income level, which calculates whether real estate is accurately reflective of economic growth. We fail, of course. Finally the price-to-disposable income ratio measures whether citizens can actually afford the houses they own, based on what they have after taxes and other debt payments. We suck epically.

The conclusion is houses are overvalued by at least 10%, and possibly up to 89%, depending on the analysis. None of this, by the way, factors in higher mortgage rates, and we all know those will be here by the time home loans taken today are renewed. That should be fun.

But these academic and economic measures miss the ugliest secret of the Canadian housing market, and the one true marker of its bloated excess: the Mommy-to-Market Ratio.

This measures the extent to which Moms (and Dads, to be fair) are messing with market forces and subverting supply and demand by shoveling their offspring into real estate ownership when they actually cannot afford it. A massive amount of money is being sucked out of inflated real estate and retirement accounts to be inserted back into the housing market in what could be the ultimate Ponzi of risk.

We’ve all marvelled at the rise of the Bank of Mom & Dad, but the latest numbers show it’s not only flooding the market with first-time buyers who shouldn’t be there (thus inflating prices), but also impacting the move-up market (inflating them more). Thanks to BMO’s ‘Home buying Report’ and the survey it did of a few thousand people we now (shudder) know this:

Almost half (42%) of all the moist Millennials and unsuspecting virgins aroused by the thought of a new mortgage expect Mom to fork over the down payment. That gift will be about $60,000 on a property costing an average of almost $315,000. The impact of this is awesome. For starters, the kids are nuts. They behave the way you’d expect others to when they’re given money for nothing. The bank found a stunning 48% are happily willing to enter a bidding war – up sharply from in the past.

Meanwhile 40% of the kids say that without this cash they wouldn’t even be considering buying. So what is the impact on the market overall?

Well, last year 481,162 resale houses changed hands. Almost 35% (according to the mortgage industry) of those deals were done by first-time buyers. So if 2015 is the same, and the bank numbers are solid, then 42% of the 168,400 first-time buyers will use the Bank of Mom. That’s 70,730 buyers snorfling an average of $60,000 – for a total of $4,243,800,000, or $4.2 billion. Generally speaking, that’s money which in normal circumstances (ie – young people not buying stuff they can’t afford) would not be spent on houses, and is swelling the cost of real estate for everyone.

Well done, Mon & Dad. Bigger mortgages everywhere.

But it gets worse. The bank also found that sucking on the parental teat doesn’t end with a first house purchase. An astonishing (to me) 42% of current homeowners who want to graduate to a better trophy home are expecting Mom to step up to the plate once again. This time the kids (who should know better) expect her to provide 20% of the cost of a house averaging $474,000 – or almost $95,000. Half of these people say that without family dole they would not be moving.

Hmm. So 42% of 312,800 move-up buyers is 131,400 couples, who expect a total gift of $12.4 billion. That gives us a grand total of over $16 billion in a year pouring into an inflated real estate market, turning it into more of a speculative gasbag. The scary part is that most of this money is coming from the equity of already-overvalued houses, or from the savings and investments of people steaming towards retirement, who are obviously counting on real estate to fund their final decades.

And, as we already know from a Genworth survey, about a third of all the kids getting pushed by Mom into real estate say they can’t make ends meet. Just imagine what happens when mortgage rates creep.

So there you go. A nation of the horny borrowing against houses they have puffed up so their lusty kids can buy more houses at inflated values after going through bidding wars, ensuring everybody pays greater than market price. And they think this is an act of love.

If they only knew.