Entries from February 2013 ↓

The season


Christmas used to come in February for financial guys. Across a dark, cold nation I would haul my sculpted butt, mincing off an Air Canada flight in some frozen hellhole like Saskatoon long enough to deliver financial enlightenment to the natives. Then back to the scotch, salty cashews and bitchy stews in business class.

But, such changes. Saskatchewan and my rear are still what they were, of course, but “RRSP Season” and its carnal rewards has gone the way of Benny XVI. Contributions in recent years have fallen by more than 50%, mutual fund salesguys can be seen collecting bottles on recycling days in North Toronto and the TV (who watches that any more?) is no longer slathered with happy retirees romping suggestively through Investor’s Group ads.

Over 70% of the people who qualify to do the RRSP thing this year, won’t. Together they have about $700 billion that could be sheltered from tax. As I’ve been spelling out this week, our lascivious lust for real estate has resulted in a massive drop in liquid assets. Now 78% of Boomers own houses at the same time as 50% realize they’ll run out of money long before they croak, and only four in ten have $100,000 put aside. Worse, 72% have no pensions. This really sucks. So, is an RRSP the answer?

For some, sure. And remember the deadline is today (March 1st) to contribute and be able to deduct it from 2012 taxable income. But the fact remains every time you put money into one of these things, you’re making after-tax income taxable again. That’s cool if you believe years in the future you’ll be taking it out again at a lower tax rate. But if you trust what the government’s going to do in thirty years, then I also have a grow-op in Surrey your wife will love.

Still RRSPs do have a role to play in tax-shifting, instead of tax deferral. You can use this vehicle to move tax to a future year in which you’re pretty sure you’ll be slumming, or your family circumstances have changed, when the funds can be removed at a lower rate. There’s also the ever-appealing RRSP mortgage, which can be used to supplant the one the bank gave you. However, in times of cheapo mortgage rates there are better ways to make money.

Well, here are ten things worth thinking about today.

I You don’t actually need money to make a deposit into a registered retirement plan. It’s quite possible just to take assets you have now (that are kicking out taxable gains) and use them to make a ‘contribution in kind.’ So for selling yourself stuff you already own, the government will send you money in the form of a refund. Be aware that doing this might trigger a capital gain if the asset has increased in value.

II One of the most useful things about getting married, other than the free advice on everything, is a spousal plan. If you make more money, contribute to the spouse’s plan rather than yours. You get the deduction, he/she gets the money and after three years can take it out at a reduced rate. That’s called income-splitting. Or, pump up a spousal plan three years before a maternity leave, and let the government finance it for you.

III If you’re terminally horny and can’t help buying a house, at least use the HBP. The rules let you launder a downpayment of up to $50,000 (for a couple) through RRSPs and after 90 days remove it and buy a house. This nets a tax rebate big enough to buy a Miele dishwasher, Wolff stove and Bosch washer/dryer set so your little friends will think you actually have money.

IV Now, be somewhat careful what you put into an RRSP. Remember if you buy stuff like ETFs that may provide capital gains, or preferreds churning out dividends, the tax advantage is lost if you hold them in a registered plan. Everything coming out of an RRSP is taxed as income, at a far higher rate. So stick interest-bearing stuff like bonds in here, and collect the dividend tax credit in your non-registered account.

V Always, always, always have a self-directed RRSP. Doesn’t mean you have to run it – an advisor can do that for you. It just means you’ve prevented [email protected] from having her way with you.

VI Are you a low-income person and figure you’ll stay that way? Then no RRSP for you. In the true spirit of Greed is Good, these plans give the greatest benefit to the wealthiest people. In fact, it’s been proven that people who retire on public benefits (CPP, OAS, GIC and my favourite, LCBO) are better off never having contributed.

VII Remember that just because you stick money in an RRSP to get it growing tax-free does not mean you have to declare this on your taxes. Why wouldn’t you? Because you might just be getting out of med school and know your income will quadruple in two years – so why not wait and claim the deduction later when the refund will be epic?

VIII Even though RRSPs may be a bad idea for increasing numbers of people, ‘investing’ in your mortgage – like women’s magazines and the CBC tell you – is worse. Nobody should be aggressively paying off a 2.6% mortgage when inflation is 3% and balanced portfolios are handing over 8%. If you don’t want to have F register your nestegg, then just build that non-registered investment account, and lock in your mortgage rate.

IX The biggest benefit of RRSPs, remember, is tax-shifting. That means if you’re planning on a sabbatical, or heading back to school, or going postal and getting fired, that income contributed during a fat year for a fat refund can be withdrawn in a lean one, for minimal tax. Just keep withdrawals to less than $5,000 a pop and the bite will be lessened.

X Finally, if you do make an RRSP contribution, don’t spend the refund this year on something you’ll regret, like a Kia. Instead, invest it in your TFSA.

Or a new Harley.

Oh Canada


If you knew a house was repossessed, and for sale, would you offer less? Duh. Of course you would. After all, if some overextended nimrod walked out on their mortgage and the lender was dumping the place, why not vultch?

If you were the broker handling the listing, or the real estate board overseeing it, wouldn’t this be relevant information for the marketplace? Duh. Of course it would. In fact, trying to hide this fact would be unethical and misleading.

But quietly, maybe fearing what’s ahead, CMHC has been doing exactly that. The government body which controls 75% of the mortgage insurance in Canada, protecting lenders against all those lusty little equityless property virgins and their high-risk loans, has now been exposed as a market manipulator.

Mario owns a real estate shop in Quebec. “So, basically, as a broker I’m not allowed to indicate that the property is a repossession. Hmmm. Kind of makes you think… Yeah, this bubble is probably popping,” he tells me.

Mario got this notice days ago from the Quebec federation of real estate boards: “The Canada Mortgage and Housing Corporation (CMHC) has stated that real estate brokers should not indicate, on a detailed sheet for a property that is for sale by the CMHC, that the property is a repossession. We inquired with the CMHC, and they informed us that this publication rule stems from a national policy that applies to all Canadian provinces.”

There you have it. The government is trying to hide foreclosures. Perfect.

And what does CMHC have to fear? Well, just look west for a glimpse.

It’s the last day in February, which means realtors will be publishing monthly sales numbers next week. In BC they’re a disaster. In the Mouldy City, the Greater Vancouver Real Estate Board recorded just 1,666 sales of all properties in the first 26 days of the month, compared with 2,302 during the same time last year. That’s a dump of 27.6%. And prices are wilting too. (Remember what I’ve told you about sales volume declines preceding price declines.) The average sale this month comes in at $744,281, down 6.3% from last year.

Now, imagine you’re a formerly horny ex-property virgin who bought a concrete skybox in Burnaby last year with 5% down. You’re now under water. After paying the mortgage, the strata fees and the property taxes for 12 months, your unit is not only worth less than it was, but your mortgage is bigger than your place is worth. And, factoring in closing costs (including the CMHC premium) and commission if you wanted to sell, you’re seriously broke.

So, you have a choice. Stay, feed the mortgage, pay twice as much as the renter next door is shelling out for the same unit, hoping that in a few years you might sell for at least enough not to have to borrow even more to get out.  Or, walk. Either way your down payment is toast.

Think CMHC doesn’t know this? By the way, here are more numbers to chew on. Total single-family home sales in the Lower Mainland (combining the Van board and the Fraser Valley Board) total 1,548 so far this month. That’s a stunning 50% drop from last February and (get this) a worse showing than in the same month in 2009, when we were plunging into the economy abyss. There’s little doubt significant price corrections will follow.

On Monday the Toronto real estate cartel, along with those in Victoria, Vancouver, Montreal, Edmonton, Regina and elsewhere will announce lower sales. Some will be moderate, some not. Without a doubt, the trend line will continue. Despite record low interest rates and the incessant pumping lately from ReMax, Royal LePage and the major mortgage-spewing banks, the real estate market is losing volume, price and momentum. The correction will be immensely uneven (bidding wars still erupt in Toronto for $700,000 to $1 million properties), but that’s the nature of housing. Those who get nailed rarely see it coming.

In this context, do we really want a powerful, massively-influential government agency fibbing to buyers? Coaxing them into paying more than an open market might dictate? Fluffing prices?

To be sure, repossessions, foreclosures and sullied virgins talking a walk are rare. Canada will never see a jingle mail revolution as in some US markets, since the only way out of debt here is bankruptcy. But the numbers will undoubtedly rise as wiped-out, whacked young buyers figure anything’s better than suicide by condo.

Except, maybe, the death of trust.