Entries from February 2018 ↓

Who knew?

People think they’re so smart, and aren’t. They buy crypto on credit cards (at least until this week). They roll the dice on weed startups. They flip individual stocks in companies nobody’s heard of. They buy condos with huge loans to rent out for negative cash flow. Or they stuff money into dodgy online banks which front for subprime mortgage lenders, just to get an extra half point in interest.

Sad. Because sitting right in front of them is a gift so powerful no government would ever offer it again, yet prays you will not utilize. And it’s over tomorrow.

Yup, the registered retirement savings plan. How else can you transfer $26,000 from one bank account to another and, for the simple act, save a potential $14,000 in tax? In the days of eat-the-rich liberalism, how did the RRSP slip through the cracks? After all, the more money you make, the greater the benefit. It allows 1%ers to contribute huge sums of cash, to write that off taxable incomes, then grow assets for decades without ever being taxed. Finally, if they’re crafty, they can retrieve a lot of that wealth without exit tax.

So the deadline to make a contribution deduct it from 2017 taxes is midnight tomorrow. The maximum amount possible is 18% of what you earned last year, to that limit of twenty-six grand. Plus add in all contributions you never made in the past. Plus an overcontribution of $2,000.

If you lack the money, borrow it. Banks will loan at prime (3.45%) and usually not require payments until your refund arrives. Use it to pay off a chunk of the loan. Now you’ve created instant equity. Or, as mentioned, transfer money (or assets) now owned into a self-directed RRSP – called a ‘transfer in kind’ – and the government will send a refund for selling yourself stuff you already owned.

If you earn more than your squeeze, open a spousal plan, stuff it up to your contribution limit and write it off your income. After three years s/he can withdraw it and pay tax at the lower rate. Presto. You’ve income-split. Ditto for a mat leave. Just plan to have a baby three years after you contribute (c’mon, let’s show a little discipline here…) and the plan can be collapsed to fund the time at home.

Sadly, most moisters don’t get any of this. Four in five, surveys indicate, have no intention of using an RRSP whatsoever – mostly because ‘retirement’ is a fuzzy, far-away, hazy thing and they’re cynical, suspicious little hipsters, anyway. What a fail. The biggest use of an RRSP is not for funding your wheelchair or boxes of KD in old age but rather for tax-shifting.

Get laid off? Use the cash in the RRSP to live on. You got a big refund when you contributed and pay little or no tax when you take it out. Sure helps.

Want a sabbatical between gigs? Then live off the RRSP money, travel the world and don’t stress about income.

Got pregnant? An RRSP is perfect for saving and growing money when you’re working, then using it to finance the pregnancy at little or zero tax.

There’s more. Like putting a mortgage inside an RRSP and make payments to yourself. Or (of course) using the RRSP bonanza to fund your TFSA. Or utilizing accumulated RRSP room to soak up the cash portion of a pension you’re commuting. Or making a contribution, getting a refund, then using both to buy a home with a bigger down payment – without triggering tax.

So why are RRSP contributions going downhill? (The average is under $5,000.) Why are so many people taking money out of their plan instead of putting it in? (As mentioned here a while back, one bank found 40% of us are raiding the plans, mostly to buy a house or pay for general living expenses.) And why are people so piteously ignorant of what this thing is, and can be used for. (Another survey found 60% of moisters think they can use RRSP money to pay for daycare.)

Simple. Nobody teaches this. Most people think an RRSP is a thing that you buy, not an investment vehicle to be filled with cool stuff that grows. (Thanks [email protected] for that.) But, mostly, real estate has sucked off so much cash flow that half of Canadians say they have no money to invest with. And many are already starting to regret it.

In summary: the RRSP is a tax shelter and tax-avoidance vehicle blatantly skewed to benefit higher-income earners. The TFSA, in contrast, is purely democratic and universal. And guess which one the government clipped?

Nice hair, though.


In a moment, the real news.

First the latest from Mr. Socks and the Chateau Kid – the nothingburger federal budget, 2018, delivered at a time when interest rates are rising, our biggest trade partner hates us, the country’s debt is swelling, the labour market is wonky and the housing market’s wobbly.

So what is the centerpiece? Yes, parental leave. Gender sensitivity. Free parks admittance for kids. Pay equity. #Metoo funding. More spending. Pharmacare, maybe. More deficits. But no tax attack. And, best, the PM did not wear a sari to the House of Commons.

The Liberals will increase spending by $21 billion over six years and finance that with borrowing. The shortfall needing to be financed will be $18 billion this year and gradually (hopefully, fingers crossed, please) fall to about $13 billion a year by 2022-3. So much for ‘the budget will balance itself’ and the campaign promise to have four years of $10 billion deficits before breaking even.

The threats: rising rates could knock this projection into the dumpster. Ditto for NAFTA, if the Trump machine gears up against the existing trade agreement (seems likely after he yelled at Mexico’s president last week). And, because our corporate taxes are not being aligned with those to the south or our companies allowed to write off equipment purchases faster, we may lose investment (and jobs) across the line.

The good news? No increase to the capital gains inclusion rate. No diddling with dividends. No new swipes at small businesses. No increase in marginal tax rates. And because there is now only one more budget before the next election, none of the above is likely to happen.

So, it was a great day for the 1%ers who swarm here nightly. As for the rest of you…

Remember the Whining Mommas post from yesterday? Well, lots more moaning to come now that we’ve heard from Jay Powell, the new boss at the US central bank. His lengthy comments on Tuesday were enough to scare financial markets, and send the Dow to a triple-digit loss (don’t worry – it’s temporary).

The reason: according to Jay, it looks like 2018 will contain four additional rate increases, with the next one happening in three weeks. Powell says the economy is ducky, new job creation is strong, wages are rising, inflation’s up and the recent stock market volatility was meaningless. So, up she goes.

A year ago this blog was populated with deniers who said rates would never rise. Since then they’ve increased four times in the States and three times here. By this time next year that could stand at eight American trigger-pulls and six in Canada. As stated, this means five-year mortgages will be 4% by Christmas, with everyone stress-tested at 6%. There’s no smearing Max Factor on this porker. It’s still ugly.

Nothing else – not retreating Chinese dudes, moronic Dipper politicians, sphincter-tight lending regs nor moister panic – has the same impact on real estate prices as the cost of money. When lending rates dropped to 2% last Spring, we saw houses jump in value each month more than in a robust year. Valuations in the GTA and the LM hit all-time highs. Bidding wars erupted. Sale prices soared over asking. Realtors turned into shade-wearing rock stars with groupies and flashy cars. FOMO soaked the landscape.

So here we are. Rates up sharply, detached house prices down 9% in Toronto and three times that in the northern burbs. In Vancouver a similar story, while in both regions it’s only the buzz surrounding condos – being snapped by kids who have no idea of the correlation between rates and prices – that’s masking the real story. As so many people with homes face mortgage renewals this year – at higher costs on reducing equity – the move-up market has croaked.

Now, to the pachyderm in the kitchen…

We know Canadians have $230 billion in lines of credit attached to their houses, which may also be mortgaged. We know this debt has inflated by more than 7% in a year. We know a big chunk of people with HELOCs pay nothing and just let the balance grow. We know the majority never pay them back. But why is this the fastest-rising kind of debt?

Mortgage broker Shawn Stillman says he has the answer. It’s B20. The new mortgage regulations announced in last 2016 and implemented two months ago – which dictate anyone changing or adding to their mortgage needs to go through the stress test – have pushed people into sucking off their HELOCs for new credit.

“It doesn’t make sense to break the mortgage that predates the October 2016 rule change; it makes sense to keep that mortgage in place and add something else on top,” he told an industry site. “It could be their reckoning because they may have to pay the piper for taking on this debt and not paying back the debt. Where it becomes difficult is where you have to pay the principal and the interest.”

In other words, people who can’t make ends meet and in the past upped their mortgage principal to get cash for debt consolidation at a cheaper rate, now turning to lines of credit because of B20. They can therefore easily tap into built-up equity (to 65%), get a relatively good rate (prime plus a half) and – best of all – make interest-only payments, or none at all.

Of course, HELOCs are floating-rate, non-amortized demand loans. That means (a) the cost rises immediately with each central bank increase, (b) the lender can demand repayment at any time, such as when your local housing market tanks and (c) interest-only payments means the debt is never reduced. Making no payments means it rises monthly to the limit.

“People keep taking on debt because they don’t have a choice, and they’re choosing products they’re not amortizing, so they’re not paying down that debt, and it will eventually catch up to them at some point in time. They’ll have to pay more interest because rates will be higher, so they may simply not pay off their mortgage and sell the house,” says the broker.

Sell the house. And guess what that means?