Entries from August 2013 ↓

Divine guidance


In preparation for my shocking new blog posts next week, let’s get some of this damn mail off my desk…

Hi Garth: First off, I’d like to thank you for sharing your insight and knowledge with your fellow Canadians.  The main reason for this email is because I’d like help in finding an adviser to put my mortgage inside my RRSP.  Additionally, I’m now a bit skeptical about the security of my money considering two recent developments.  First is CRA stating that should the government fail it will seize private and public pensions.  Second, on page 145 of the 2013 Canadian Budget it speaks of a Cyprus styled “bail-in” policy should the banks fail.  I was wondering if you have any literature in response to these developments or if you still believe that an RRSP is a safe investment. – Robert

Bobby, you need help. And not with the RRSP thing, but rather with your information. Dude. Stop reading those idiot doomer web sites. They’re worse than porn. Or HGTV. The damage to your long-term health is incalculable. The CRA has said nothing about the government failing or pensions being seized. That’s too dumb for further comment. As for the bail-in, it was discussed at length here months ago, and there’s zero to it. First, no big bank will fail. Second, even if one did, no bank account will be seized. It’s an urban myth created by the gold-humpers.

As for the RSP mortgage, this is a bad idea when home loans are still 3% and you can earn 7% or better on a balanced portfolio. The juice just isn’t there to go through the considerable cost of setting one of these things up. Ask me again in 2015.

Here’s the situation – the missus and I just ignored your advice and bought our second house. Some background: she’s a college instructor and I work in the arts. We’re mid-30’s, have a beautiful baby, and just sold our Toronto house that went for crazy money in a bacchic orgy of bidding ($800,000). Fearing the Toronto market we bought a gorgeous spread that we really love 2 hours outside of the Big Smoke in a rather wealthy semi-rural enclave ($420,000).

Here’s the rub: if I sink EVERYTHING into the house, we’d still owe 20,000 to buy it outright and would still need about 60,000 in essential renovations. We are completely debt-free with almost 400,000 in the bank (pre-house purchase). But my work is up and down – I pull in anywhere from 50,000 to 200,000 (or more) a year with no idea where I’ll land in that range – so I want a bit of a cushion as a soon-to-be sole breadwinner… let’s say 50K.

My mortgage broker is pushing both a mortgage and a HELOC on me “just in case”. When he said max-out because “money’s cheap” I think I wanted to punch him in the neck. I hate HATE HATE debt. So what do I do? Do I diversify? And as a neophyte – diversify in what? REIT’s? Do I plow it all into the house? So many questions. So few answers. I’m in the arts, dammit! Seriously Garth, this keeps me up at nights. This and global warming. And maybe clowns. But I need advice because I’m too confused to act. You’ve scared the hell out of me! – Francis

Actually, you followed my advice quite nicely. You sold at the top of the market. You took obscene advantage of a greater fool. You downsized. All good, my boy. Now don’t screw it up.

So here’s the plan: First, make nice with the mortgage guy and get him working on a secured line of credit. Tell him you expect it at prime. Now, plow all of your cash into closing the new house, avoiding a mortgage of any kind. Don’t hold back $50,000 for what-if-it-rains money, since that’s a complete waste of capital (and what LOCs are for).

After you close the deal, cue the mortgage guy and borrow back $300,000 on a HELOC (at prime). Set aside fifty for renos, and put the rest into the hands of a smart fee-based advisor who will build a conservative, balanced, diversified portfolio you can be confident in. Now you own your home with no amortized, costly mortgage. You have a liquid portfolio. You’ve diversified your net worth. And you have a 100% tax-deductible home loan – which can be paid off at any time (if need be).

Being artsy, Francis, does not need to mean failure.

I’ve been reading your blog for months now, and although I agree with your reading of the Canadian economy in general and real estate market in particular, thus far I had decided to keep my 3 bedroom Calgary townhouse, because even if it went under water for a few years, the monthly payment is still slightly lower than renting the same property on this nice suburb.  My wife and rented another townhouse in Sunnyside (the hipster neighborhood that is a 20 min walk to everything cool in the city, and also to our offices), and rented out our own townhouse for the same amount that we pay for mortgage, taxes and condo fees.  This was in May.  A few weeks after, we were being evacuated and had to spend almost two months away while our landlord re-built the Sunnyside Townhouse.  Now, after watching the surge of countless new Townhouse projects in the South of Calgary, all similar to ours, I am seriously thinking of listing my property, even thought I will just break even.
1. Since my own Townhouse is technically not my main residence anymore, do I pay income tax on the money I get for it?
2. I paid CMHC insurance on the $243k that I got from the bank in 2009.  Since I am going debtless now, do I get any of that CMHC premium money back?

What you need to know: (1) The rent money you’ve been getting for the townhouse is taxable, and must be added to your earned income, which means it is Hoovered at your marginal rate. But you can deduct all expenses from this, which sounds like a wash. (2) When you sell the place, any capital gains earned to the time you moved out are tax-free, but gains in value since then are taxable. Hope you got an appraisal or valuation done. (3) Get CMHC money back? Surely you jest. (4) Stay renting. This is not the time to buy in Cowtown.

My question/comment is quick. First you have proven your case about real estate over these few years and are now vindicated. Enough said. Please focus on saving/investing more. On that note I am a fool who has sat on the sidelines in cash the last two years subsequently missing out on a boon for returns. Looking back at a year of returns for individual large cap US stocks reveals big returns. My question is this, how can I confidently jump in now? Isn’t the likely scenario going forward modest or negative returns? In other words did I miss the boat entirely? Do I wait for a pullback and if so at what approximate level? Help because I and likely others can’t afford to lose any more.

Despite the crap you read in comment section below, the US economy continues to revive, grow and expand (check out the latest GDP stat, housing sales, corporate earnings, deficit dump or job creation scorecard). Markets have surged because of that, plus accommodative monetary policy. And while stimulus will start to be tapered away next month, the economic growth will continue. Ditto for strong markets over the long term.

There may well be another dip coming – like the 8% one last year, the 20% drop in 2011 or the 6% decline two months ago. Did you buy those? Of course not. Humans are programmed to fear falls, not take advantage of them – which is why most investors fail. So maybe you should get somebody to do this for you.

In any case, buy equities to meet long-term goals, not short ones. Don’t buy individual stocks unless you have seven figures to invest. Diversify broadly to grab growth with less volatility. ETFs are the best choice there. And don’t overdo it. US markets should be maybe a third of the growth portion of a portfolio that contains 40% fixed income. The best news? REITs and preferreds are still on sale. Low price, fat yield.

Start there.



Once upon a time, in a condo tower in the ambitious burbs, lived a dude named Tony. One morning he woke up, flicked on Global News and was gobsmacked. “Housing sales soar?,” he said out loud, which was pretty much wasted since his GF had split in disgust. “I must sell.”

So he did. First the ethical realtor showed up, said he’d charge the usual 5%, and that the place was worth $319,000, tops. Not enough, T muttered. Then the family-friend realtor came by, said he’d low-ball the commission and list for $340,000. Sold, said Tony.

But not so fast. First he had to stage it (and discovered that GFs have other, practical, uses) which cost two grand. Four months went by, and only one offer. “Lousy vulture!” said an inflamed Tony, and he didn’t even sign back the $320,000 bid. When the listing ran out he shipped back the chi-chi leather chairs, changed realtors, repriced the place at $329,900 and drank too much wine.

Two weeks ago, another offer, for five thousand less than the last one. Tony talked it up to $320,000, and capitulated. “Never again,” he spewed. “I’m renting. And no more real estate bullshit.” No wonder. Three extra months to sell with carrying costs of $2,000 monthly, plus the staging meant he was out $8,000 – in addition to paying the regular commission. Instead of profiting from a rising, hot market, Tony was spanked in a buyer’s market.

Lessons: Never believe Global. Or the real estate board. Never choose a realtor just because she’s cheap. Never choose an asking price without knowing what the comparables are, or true market conditions. Never pick an agent just because they promise an inflated sale price. If you don’t get traffic or offers, then you screwed up and need to drop the price. Always  keep a GF around to shovel up your debris and stop you from being a dickhead. Never get emotional over an offer – work with it. And, most importantly, don’t buy what you can rent for half the cost, then walk away from at will.

In most markets, condos are now toxic. Current buyers won’t see any appreciation, after taxes, fees and commissions, for years to come, at best. It’s impossible to buy a condo, rent it out, and even cover your costs. Prices are poised to enter a multi-year melt as supply overwhelms demand in places like Toronto, Calgary and Vancouver, as is already happening in Winnipeg and Montreal. Renting units will grow cheaper as more come on stream and flippers who bought on spec become reluctant landlords. With no equity growth and vastly higher monthly costs, owners will see their net worth eroded while landlords subsidize tenants.

But, it gets worse. As I told you more than a year ago, condo flippers, speckers, short-term owners and even many unsuspecting buyers could end up on pointy end of CRA, facing significant and totally unexpected tax bills. That seems to be ratcheting up into high gear now, with the tax cops papering Toronto and Vancouver with ‘questionnaires’ about condo buys and sells. If you receive one of them, have your dog eat it.

Always on the quest to find new money to support Mike Duffy and Pam Wallin, the feds are deep into audits on the Toronto condo scene. Anyone who bought a unit pre-construction, then sold for a profit without actually moving in, is liable for capital gains tax, and must also repay the GST/HST refund that residents receive. That’s pretty obvious.

But the revenuers are also after people who bought new condos, lived there for a few months, then sold for a gain. They, too, are being served with bills for capital gains, tax rebate repayment or worse, since the time spent as occupants was not great enough to consider the condos to be principal residences. Instead, the units are being classified as investments – meaning you can deduct the mortgage interest from taxable income, but face tax on the entire proceeds, possibly as income. Now real estate brokers are being warned if they suggested this strategy to new-unit buyers at any time during the past seven years (the audit period), they could be sued by their former clients, the buyers.

By the way, there is no hiding. The CRA has access to every shred of information about purchases, assignments, sales, mortgages, commissions, rebates and profits. That includes lists of buyers provided by developers and sales data from land registry offices. Escape is futile. You are surrounded.


Condo-hopping has been a totally accepted method of harvesting real estate gains by people who thought that by living there, all profits were tax-free. It’s also been at the heart of strategies suggested endlessly by developers and promoters like the legendary Brad Lamb. It’s at the core of a flawed and dangerous strategy the cultists at REIN call ‘the property ladder.’ So, beware. CRA will give you tax-less profits on real estate only if it believes you bought the place to live in, not to diddle with.

What a refreshing concept.