Entries from October 2017 ↓

Do it

When the feds proposed whacking the self-employed with a menu of tax hits over the summer, lots of people cheered. Many were here. The comment section, way down in the hold with the rats and spiders, exploded with anti-entrepreneur, anti-doctor, anti-small biz emotion. Overwhelmingly the sentiment was that regular working, ‘honest’, salaried deplorables can’t deduct stuff or pay their spouses so why the hell should some dude with a print shop get to?

It was music to Liberal ears. That was the strategy. Divide and conquer. Call the self-employed loopholers, infer they’re cheating everyone else, then jack their taxes with impunity. As you know, it almost worked. Some measures have been shelved (a 73% tax on retained earnings income) while others will go ahead (no income-sprinkling).

Lost on most of the wailing employees was the fact they, too, have a bevy of ways to reduce tax. Most of them are never utilized, because people are too busy working, minding their families, retweeting Trump, or bitching about others. So, here’s a handy checklist of a few of the most obvious. Print it out. Tape it to the fridge. Do it.

Do you and your squeeze both work? If one earns more than the other, have the chief breadwinner pay all of the regular expenses – mortgage, rent, food, daycare, weed, insurance, booze, clothes, rehab. Make the lesser-monied spouse the chief investor in the family, so the returns (capital gains, dividends, interest) will be taxed at a lower rate.

Ditto for registered retirement savings. If you earn considerably more than s/he does, or have a defined-benefit pension, use up all your RRSP room for a spousal plan. You write the contribution off your higher taxed income while your spouse gains control of the money. After three years it can be withdrawn at their lower rate – so you’ve just sprinkled!

Here’s another one, if there’s an income disparity between you: loan your less-taxed spouse a bunch of money for investment purposes. S/he puts it into a nice little non-registered account and starts collecting dividends and earning capital gains in a tax-efficient way. Even though it’s your money, none of that income is attributed back to you – so long as this is set up as a loan at the CRA’s prescribed rate of interest which is, believe it or not, just 1%. Interest must be paid annually by the end of January but all of that is tax-deductible. Yes, your spouse can write it off the investment returns. This works for kids over 18, too. More sprinkling!

Also with income-splitting: if you are a wrinkly collecting CPP (everybody should start taking it at 60, no exceptions), this can also be split with your less-taxed spouse.

If you didn’t listen to the advice on this blog, bought individual equities and were handed your rear end by Mr. Market, sell those dogs before Christmas in order to realize a capital loss which can be used to reduce taxes on capital gains. Losses can be used to neutralize gains not only in the current tax year, but going back three more years. This can help you recover taxes that you paid as far back as 2014.

You can also take crap assets that dropped in value and dump them on your kid. Another great reason to have children! Investments can be transferred to a minor child and that will also trigger a tax loss in your hands which can be used to offset gains. Now your spawn has an asset that, when it recovers in value, will be essentially tax-free with none of the gain attributed back to you.

Fill up your TFSA, obviously. Also that of your spouse. And your kids over the age of 18. Gift money to all of them with no gains TFSAs attributed back to you. Remember, $5,500 a year for 35 years earning 7% will result in $819,000, of which more than six hundred grand is compound growth. So ensure these are not savings accounts, but investment accounts – no GICs, HISAs or other dorky stuff. Also when you retire, a $819,000 TFSA will give you about $50,000 a year in taxless income which will not reduce your CPP or OAS by one cent.

If you’re 71 and have to convert an RRSP to a RRIF, be thankful you robbed the cradle and married a babe younger than you. Your mandatory retirement fund withdrawals can be based on the age of your spouse, keeping them to a minimum and allowing your nest egg to grow larger, longer.

Obviously put money into a RESP for your kids. The feds will give you an automatic grant equal to 20% – so for a $2,500 contribution you receive $500, up to a lifetime total of $7,200. Free money. Duh. Why would you not do this? If your kid grows up to be a rock star or a high-net-worth, Mercedes-driving plumber you can fold much of the RESP money into your RRSP. Remember to buy growth assets. Establish a family plan for multiple kids, not separate ones. And, for God’s sake, avoid the RESP-flogging baby vultures that skulk around hospitals. Go self-directed.

And, yes, use RRSPs. They’re still the best tax-shifting vehicle around, allowing you to write off up to $25,000 in taxable income a year. You can borrow money cheap to contribute, then use the refund to pay much of it back. Or open a plan, shift in assets you already own, and get paid money by Bill Morneau for selling yourself stuff you already own. That should make his head all splody.

So, there you go. Ten ways to cut your taxes without even becoming an MD!

When you finish doing all those, you can complain. Until then, stuff it.

Recession monitor

RYAN  By Guest Blogger Ryan Lewenza

We are not “market timers” at Turner Investments, aggressively shifting in and out of equities. Instead we employ a disciplined, long-term approach, using the benefits of balance (mix of equities and fixed income) and diversification through broad-based ETFs. We do this for a few key reasons. First is it very difficult to consistently time markets as you need to get both the sell and buy just right. Second is that over the long run equity markets rise so you’re basically trying to bet against this long-term trend and human progress. Third is that by employing our balanced approach this should generate returns of 6-7% annually which, if you start early and stay committed to the plan, will be what most need to achieve their financial goals.

While we don’t make big bets getting in and out of the markets we will from time to time reduce risk in the portfolio and make tweaks if we believe we are heading into a bear market. Having studied the markets for over two decades I have found that there are two main drivers of bear markets – recessions and exogenous shocks. Since I can’t predict exogenous shocks, today we focus on the outlook for a recession, which I’m happy to say looks remote over the next 9-12 months.

Below is a table of key leading economic and market indicators that historically have done a decent job of predicting recessions. Now there’s a lot to digest, so before you break out into a cold sweat and move on to Brietbart for you ardent Trump supporters, or the New York Times for you pot-smoking hippies, let’s review some of these indicators and what they signal for the US economy.

First is employment data, including initial jobless claims, the unemployment rate and wage growth.

As an economy picks up, wage growth begins to accelerate as employees have more pricing power, which in turn drives up inflation. Central banks then respond by aggressively hiking interest rates in an attempt to curb inflation. In the last six recessions dating back to the 1970s, wage growth has averaged 5.8% Y/Y at the beginning of each recession. Currently wage growth is just 2.5% Y/Y, which is an important reason why overall inflation remains benign and why the Fed and other central banks are being very gradual in hiking interest rates.

Typically we see a spike in jobless claims prior to and during recessions with jobless claims at 367,000 on average at the beginning of recessions. Currently, jobless claims remain at historically low levels of 258,000. Similarly, the unemployment rate begins to move higher at the start of recessions, historically averaging 5.6% versus the very low level of 4.2%. So none of our labour indicators are suggesting an imminent recession.

Next up is my favourite economic statistic (yes I said favourite….Garth doesn’t let us out much), the Institute for Supply Management (ISM), which measures manufacturing activity in the US. This is my favourite economic indicator given its long track record, its high correlation with the S&P 500, and that it typically leads important changes in the US economy.

Typically it peaks ahead of the overall economy and on average is 49.4 at the start of recessions. Currently it sits at 60.8, recently hitting over a decade high. This great leading indicator is suggesting strength in the US economy, not one on the precipice of a recession.

Turner Investments Recession Monitor

Source: Bloomberg, Turner Investments

And then we get to the mother of all recessionary indicators – the US yield curve. The yield curve measures the difference between short dated government bonds (91-day Treasury bill) and long dated government bonds (10-year Treasury bond yield).

When the US economy begins to heat up, the Fed responds by hiking interest rates, which pushes up the 91-day T-bill. The Fed has no control over the 10-year bond yield, which is determined by market participants and its level is based on a number of factors including inflation expectations, economic growth rates, term premium, etc.

When the Fed pushes up the 91-day T-bill yield to the same level of the 10-year bond yield we get what’s called an “inverted yield curve”. Basically when we see this, we need to be preparing ourselves for a recession since an inverted yield has correctly predicted every recession since the 1960s. From the table above you will see that the average spread between the 91-day T-bill and the 10-year bond yield is -22.5 bps at the beginning of recessions. While we have seen a flattening of the yield curve over the year as the Fed has hiked interest rates, the yield curve remains positive at 129 bps and nowhere near levels suggesting a recession. But once this goes inverted, look out!

US Yield Curve – Best Predictor of Recessions

Source: Bloomberg, Turner Investments

And finally, the Federal Reserve publishes a probability recession model and it currently stands at an incredibly low 0.18%, so based on the Fed’s models, a recession doesn’t look to be in the cards over the next 6-9 months. Now we all know the Fed’s economic projections are, how do we say, crappy, but when we combine their models with our tested indicators, we conclude that a recession is highly remote over the next 6-9 months. So stop freaking out about the all-time market highs as a recession is what’s going to end this current bull market, and that’s just not in the cards at present. And now is the time for my weekly flogging by some of the blog dogs in the comments section as they rip this analysis apart and tell me we’re already in a recession (because government statistics are a lie) or are on the cusp of recession any day now.

Fed Probability Recession Model at Just 0.18%

Source: FRED, Turner Investments
Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.