Pay attention


For the past three years Sam’s worked for one of the biggest well-servicing companies in northern BC and Alberta. A good gig. Until now, of course.

“When I started we had a base in 30 towns from Fort Nelson to Medicine Hat with approximately 1,000 guys working in the field. As I write this today we have a base in Red Deer and one in Fort Nelson and we’re down to 80 guys in the field.”

By the way, did you read about a major oil patch support company laying off 90% of its employees? Of course not. This is the new reality. Economic mutilation, one little lick at a time.

“Fort Nelson is a ghost town….people are turning in their keys,” says Sam. “Old timers up here say it’s the worst they’ve ever seen…worse than the 80’s. The news hasn’t given this any justice. People are losing their shirts and it’s not just the rig workers. It’s the local restaurants that are boarded up…the Boston pizza is laying off, companies are pulling out. People don’t realize but this will trickle down south of here too – it’s just a matter of time. The big companies aren’t investing in the patch because of all the uncertainty and it shows. I’m lucky, I don’t live up here I commute from the lower mainland. I couldn’t imagine if I moved up here for work like so many people have. When I read some of the comments on your blog I have to laugh. People who think this oil shock will never reach them…it’s coming.”

Oil creep’s something the feds are terrified of, even if you aren’t. Days ago the CEO of Canada Mortgage and Housing gave a private presentation to finance guys in New York and warned that if oil drops to $35 a barrel (it’s now $41) and stays there for five years (oil started crashing two years ago) that houses in Canada could lose 26% of their value. Just for context, the US middle class was decimated when real estate prices declined 32%.

Oil at thirty-five bucks is not a stretch, seeing prices have declined 40% in a year, supplies are at record levels, the US is about to sell off a big hunk of its strategic crude reserves, and Iran’s set to tell OPEC this week it will be pumping its bootie off, now that it’s got a nuke deal with the States. One thing we know for sure – those Calgary oil execs who a year ago said recovery to $80 was a done deal are busy trying to sell their Cowtown McMansions. There’s so much office space for lease there a local commercial realtor calls it “a bloodbath.”

But this is not about Alberta. It’s fairly hooped, especially with a government viewed as anti-oil, about to slap a carbon tax on everything. These will not be easy years for what was once the promised land where kid technicians made two hundred grand and spent half that on a truck, or $700,000 on a crap house in Fort Mac.

Instead let’s focus on the wider consequences. There have been three engines of economic growth in Canada since the financial crisis plunged the world into quasi-deflation. Oil. Houses. Debt. Now the first one has turned into an economic negative, resulting in serious job loss and a drop in national income. That leaves real estate and the money borrowed to support it (the banks).

Without a doubt, we’ve become more dependent on housing every month that oil’s tanked. One in five jobs created this year came from real estate, and 90% of all jobs created since the spring. But at the same time, the housing market has narrowed. Most markets are seeing sales slow, stagnate or decline, many with zero or negative price growth. It’s only in YVR or the GTA that the boom carries on – although in 416 average detached prices have dropped below peak levels.

At the same time, the meme is changing. Stories about a real estate correction are far more prevalent than a few months ago, which makes this pathetic blog seem less weird all the time. Last week a major bank started warning people of imminent mortgage rate increases, for example.

So, it’s reasonable to conclude we are past peak house.

What about the debt thing? The Bank of Canada dropped rates twice this year specifically to draw forward demand – a term the pointy heads use to describe how cheap money lures people into borrowing and buying stuff they wouldn’t have bought otherwise (or might purchase later). It worked. Household debt’s at a new record high. Mortgage debt bloated another $75 billion this year. We are pickled in it. This is now a debt culture.

So what happens when the Fed begins to normalize rates on December 16th, as seems likely? Well, we follow. Since 1989 there’s been a 0.91 correlation coefficient between US and Canadian five-year government bonds. That means the odds of our bond yields jumping along with theirs is 91%. The bond market is where fixed mortgage rates (that 86% of people have) are set.

As TD economist Brian DePratto told Bloomberg yesterday: “As they start to tighten, the direction is clear: you are going to see that pass through to the Canadian five-year.”

Oil’s in a funk. Real estate’s wobbly. Debt swells.

At least be glad you don’t live in Fort Nelson. No Boston Pizza? Seriously?

The rich guy


Our hot new prime minister says when Parliament resumes this week that slashing middle class taxes will be job one.

So, mirabile dictu, most working grunts think they’ll be paying less and getting more. It’s the change-hope thingy. Fortunately you have this blog to disabuse you of such things. Let’s begin, shall we?

First, the tax cut primarily affects those earning between $45,000 and $89,000 and for them (the folks at the top end of this range) the savings equal less than $13 a week. The average will be about eight bucks. However, 66% of Canadians who file tax returns earn less than forty-five grand, so no tax cut for them.

That leaves nine million people who will get those few extra dollars a week. Meanwhile everybody believes the rich – the top 1% of us – will be reamed. And they like that. The prime minister made a big deal of this on the campaign trail, saying people who already give up close to half their incomes, “should pay their fair share” – which to those on the left means paying more.

So how many rich guys are we talking about?

The new top tax bracket will click in at a taxable income of $217,000 (the existing 29% rate travels to 33%), and this will affect just 264,000 taxpayers, or 0.75% of citizens. The Libs claimed this would raise $2.6 billion in net new revenues, which works out to an average of almost $11,000 per rich guy in additional tax. This, logic tells us, is ridiculous.

In order to save eleven grand in taxes, all a rich guy need do in 2016 is max out his RRSP contribution, since there is $25,370 in new room available – which will net a refund greater than the additional tax burden. Of course, if the rich guy is a doctor (about a third are), then by putting his or her spouse and kids on the medical professional corporation payroll he can slice his taxable income. Or convert from salary to dividends. Meanwhile entrepreneurs can establish a holding company and flow up cash flow from the Opco without tax being triggered, then bring it home through a family trust or dividends, making use of the dividend tax credit.

Of course, a rich guy with a fancy accountant can also use flow-through shares and garner tax-saving investment credits. He can establish an Individual Pension Plan (IPP) or a Retirement Compensation Agreement (RCA) to actually salt more pension money away than RRSP rules allow. And he can earn unlimited income in the form of capital gains from investment portfolios, and reduce the tax rate by 50%.

In short, there’s no way the addition of the new tax bracket will raise $2.8 billion for the new government to spend (last week the hot one committed $2.6 billion more to developing countries in the name of climate change). And if you’re one of the chosen 264,000 people now in the crosshairs, I trust you’ll be giving serious consideration to the above strategies, plus a whole lot more.

Craig Alexander is a smart, reasonable fellow who impressed me when he was a big cheese economist at TD Bank. These days he’s helping run the CD Howe Institute, and his conclusion is that by increasing rich guy taxes Ottawa will actually erode the overall tax base – a phenon many other jurisdictions have seen develop. The extra tax burden will trigger more tax avoidance activity and result in the 240,000 people reporting about 5% less in taxable income than they do now. That will strip $7.3 billion from the tax base, and the Libs will end up with 70% less than they claimed. Worse, this decline in the tax base will cost the provinces about $1.4 billion in revenue.

Well, so much for the rich paying for a tax cut for the middle class – which is now down to 33% of the population. But there’s more. According to Alexander, here’s an actual danger of trying to soak the successful:

“The reduction in tax rates for middle-income households is desirable, but the heavy taxation ?of high-income Canadians is at odds with the desire for more entrepreneurial activity. Canada is in an international war for talent. Canada needs competitive tax rates for high-income earners, or we run the risk of a brain drain and the risk of being less able to attract foreign talent. Excessively taxing the talent that fuels a more innovative, creative and successful economy is ultimately self-defeating.”

Meanwhile there are other costs to paying for the eight bucks a week a third of taxpayers will save. The TFSA contribution limit will be slashed from $10,000 to just $5,500. Income-splitting is being erased, so couples with a stay-at-home parent will be impacted. And contributions to the public pension plan will, says the prime minister, be increased as part of reform. The estimate is by about a thousand dollars a year. BTW, the CBC has reported our wealthy PM has put two personal nannies on the government payroll. They’re with him in Paris this week.

You may or may not agree with what’s coming later in a few days. But you should at least know the context. If you’re a .75%er, then 2016 will be the year you get serious about tax avoidance. Lucky for you, it’s easy.