Entries from December 2014 ↓

Well, so much for that. Stick a fork in Calgary real estate. It’s done.

Eons ago (at least last week), this blog told you sales had just slipped into negative numbers in Cowtown as plunging oil commenced its toll. Smart cowboys immediately listed and looked for buyers. But in all of December there were barely more than a thousand of them.

Year/year sales in the country’s hottest market choked, for the first time in almost two years. A string of 20 consecutive gains has now been broken, as sales in December fell 7.39% from the same month last year. But that’s just half the story. As consequential is an explosion in listings – new properties for sale in December popped 41.86%, while the number of total active listings climbed 42.3%.

Remember what happens when falling demand meets rising supply?

Right. Demand falls further, since buyers quickly understand this is all leading to lower prices. So why buy now? Less demand in turns breeds more listings (the dearly indebted scrambling to save their butts), which puts greater downward pressure on both demand and prices. Finally, if you think this will be contained to Alberta (poor, cold Edmonton and desperate little Ft. Mac will follow), you’re not paying attention.

Welcome to 2015. The year of Oilmerica.

The price of the main commodity Canada exports will probably stay in the ditch for some time. Months. Maybe the whole year. I have no idea where the bottom is. Perhaps this is it. Or it could be forty bucks, or less. But it’ll sure have an impact everywhere in this nation as government revenues are sliced, fly in/fly out workers from Newfoundland to Victoria are grounded, oil companies struggle and major projects are shelved, hurting suppliers from the GTA to 604.

For example, I talked with Brittany last week who called me from her Civeo base camp south of Mac, somewhere in the godforsaken tundra where she’s helping build a pipeline. Two days later Civeo, a giant company which provides housing for oil workers, said it’s laying off a thousand people. Oh yeah, and its stock lost half its value.

A year ago almost 80% of Civeo’s lodge rooms in Canada were under contract to the oil companies. Now, heading into 2015, that’s dropped to 35%. Last year the company spent $280 million. This year the budget will be more like seventy mill. This is not just a problem. It’s apocalyptic.

Remember what this blog has been telling you for some time about the Canadian economy? Well, it’s here.

Meanwhile the year of Oilmerica could hardly be more different south of the border. Americans will save at least $75 billion on cheaper gas prices in 2015, says the American Automobile Association. That’s a huge number – all of it dropping into disposable income. Already the US economy is seriously revving up, after but a few months of half-price energy. The economy blistered ahead at the rate of 5% in the last quarter, on the heels of the best six-month growth in ten years. Over 320,000 new jobs were added in November, on top of an average of 240,000 a month all year. Consumer spending is surging higher, along with confidence. Housing markets in Miami and San Francisco, New York and Washington are being called bubbles once again. Cars and trucks are flying off dealers’ lots.

While energy producers like Canada, Russia, Nigeria and Venezuela take it on the chin, energy-suckers like America, Europe, China and Japan stand to benefit. The greatest gain will belong to the biggest consumer, the USA.

So, expect this in 2015: A surging US dollar, putting downward pressure on commodity values. A robust and growing American stock market, taking the Dow and the S&P to new heights. Higher interest rates, as the Fed moves to contain the party in the next three or four months. And all of this will help some Canadian industries (especially as our dollar weakens more), like the lumber guys. But because so much of our condo economy is real estate-based, overall, prepare for more stumbles.

For investors, there are many implications. Like, gambling on oil could wipe you out. Also, the Canadian portion of your portfolio could disappoint, so it’s too bad that 70% of all investors here have 100% in Canadians assets. Yikes. Conversely, a balanced portfolio with two-thirds of its growth component in US and international companies should do very well. And, of course, you should keep your bond durations short (as rates edge up) and vultch high-yielding preferreds at improved prices. More later.

But it’s New Year’s Eve and I’m still writing this. Way past pathetic. The only thing worse would be reading it.

Anne’s smart. Sold her house at the top. Took the money, dumped it into good ETFs and lets the returns pay the rent. “I’ve maxed my out my TFSA and the remainder is in my investment account,” she says. “However, I am a single mother and have three children over the age of 18.”

So, Ann smells an opportunity.

“My plan,” she tells me, “is to give money to my children to invest in their TFSAs to reduce my taxes from the regular account. Eventually I would be able to transfer all my money from the taxable margin account into the four TFSAs (mine, and my three children). This would send my taxable income to zero and allow me to claim the maximum from CPP etc. From what I have read, gifting between family members is tax free in Canada, so when I need the income from their TFSAs they should be able to withdraw it and give it back to me. This also helps with estate planning as if anything were to happen to me a portion of my money will already be in my children’s accounts. Essentially I am planning to give money to my children for them to invest tax free and they in turn will pay for my retirement.

“My question is: Is this legal?”

Told you she was wily. And the answer appears to be yes, although many are convinced it runs afoul of anti-avoidance rules (GAAR) . In this case Anne gives each kid at least $5,000 for every year they were 18 or over, then another $22,000 on Friday when we get the 2015 contribution room. If little Joe Owe does what I believe he will in this winter’s federal budget, next January Anne can move another $40,000 from her non-registered investment account into the totally tax-free environment of the four TFSAs. It wouldn’t take long at that rate for hundreds of thousands to be split between accounts, throwing off income that will never be taxed.

Here are some things to remember when considering this mother of an asset-splitting, tax-decimating, retirement-pumping, clawback-defying, controversial strategy.

First, yes, gifts to kids aren’t taxed. But you can’t just dump money into junior’s TFSA. Instead the funds must be gifted in the form of cash, a cheque, money order etc. If the brat takes PayPal, that works, too. Then the child has to open the TFSA in their own name (providing their SIN), make the deposit and invest the funds.

You cannot use contributions in kind, either, like you can with moving existing assets you own into your own TFSA. So, exchange-traded funds that Anne holds most be sold, then the cash passed on. If there are capital gains involved, she’ll be taxed on them. Capital losses on some can be used against gains on others, or stored for tax reduction in future years.

Each year the kids can sell growing assets within their plans, or take income spun off in the form of distributions or dividends, and give it to Mom to pay the rent. No tax, of course. And in each successive year, if they’re earning income themselves, for example, the withdrawals from the previous year can be replaced, along with new annual contributions made.

By the way, $22,000 a year going into these four TFSAs earning 7% in a nicely-run balanced ETF portfolio would give a total nestegg of $347,000, or which $105,000 is taxless growth after a decade. If this went on for 20 years, the total would be one used Kia less than a million dollars. Of that, $525,000 would be tax-free profit.

And all of this potential income going to Anne would be non-reportable. In other words, none of it would need to be declared on her tax return, meaning on paper she’d be destitute enough to collect her CPP payment, the public pogey OAS and maybe that hardship cash called the GIS intended for the poor (making about $17,000 or less). Is it fair a women with a million bucks in investments within her family and an income stream of seventy grand or so pays absolutely no tax and collects two thousand a month in government benefits?

Of course not. But TFSAs help make regular people rich, and rich people richer. Too bad 80% of all the deposits ever made into these things sit in cash or GICs. More proof this is a nation of financial illiterates.

Well, I should point out one fatal flaw for Anne. The very minute she gifts money to her kids to invest in their accounts, she no longer owns it. She cannot reclaim it. She can’t touch it. She’s not supposed to profit from it. If they decide to cash it in and buy Brad Lamb condos on the wrong side of the tracks in Calgary with 5% down, well, tough. This is why your children should always live in mortal fear of you.

Anyway, just two days until that sexy new TFSA room materializes. And you thought Christmas was a big deal. Pfft.