Entries from May 2019 ↓


Big sighs in Ottawa this weekend as the US ended tariffs on steel and aluminum. Just that that. Tweet. Done. The next stop is ratifying NAFTA 2. Then Trump ordered his guys to launch auto talks with the EU and Japan, just one day before tariffs could be imposed. Now there’s a six-month reprieve. New duties are unlikely. After all, there’ll be election primaries happening in the US by then.

So it looks like Trump the global bully is trying to reduce trade war risks so (a) he can focus on trashing China, (b) now that Joe Biden is nipping at his heels and (c) so the stock market doesn’t get spooked and sell off.

He may not have started off as a politician, but he’s one now. And Trump wants to win in 2020. Bad. There’ll be but one issue. The key measure of government to most Americans is the economy, providing the environment in which people can do better. So far, despite the trade wars, the unpredictability, lack of couth, borderline illegality and diplomatic skills that have pissed off most of the world, Trump has delivered. Unemployment’s at a 50-year low. Corporate profits have been robust since the big tax cut happened. The stock market is close to an all-time high.

So far this year the S&P 500 is ahead more than 13%. Even factoring in the Christmas Massacre (a 20% decline), the market is sitting 7% above this day a year ago. The high-water index mark was 2,954 and now we’re at 2,840. The Dow and the Canadian market have similar stories to tell. Investors who snoozed through the 2018 selloff are sitting pretty right now. Those who seized that moment to buy assets on sale have made out like bandits.

Trump obsesses over markets. In countless Tweets he’s equated equity advances with his own magnificence and omniscient omnipotence. He wants growth, expansion and advance, even if it brings inflation and rate pressures. The Dow is his proxy. And Trump well knows that tariffs, trade wars and the increased costs they bring worry investors, tank stocks and make average families wonder if things are getting worse, especially when their 401k retirement plans are shrinking.

Besides, there’s an election coming. Two dozen Dems are squabbling for the right to take him on. And now Biden has arisen through the gaggle of lefties, dreamers, econuts, feminist crusaders and socialists to present a credible, centrist, experienced alternative to the weirdest president ever. Trump needs the Dow to go to the moon. China’s still the ticket to that ride.

The strategy, therefore, looks good for us. Drop the spitting match with Canada. Get the new NAFTA signed. No more countermeasures on American ag producers. No car duties. Make nice with Europe and Japan. But at the same time isolate China with big tariffs, strong rhetoric and kneecapping their showcase tech outfit (Huawei). Then follow that with a blockbuster US-Sino trade deal just as Biden is schlepping his way across America.

Some institutional research floating around Bay Street supports this theory. “Tariff Man vs. Dow Man” (Pennock Idea Hub) spells out the inherent contradiction in Trump’s approach, suggesting the rest of 2019 may come down to one word. Volatility.

Trump’s two personas are on a collision course with each other. On one hand, he likes to style himself as Tariff Man, because he believes the U.S. has had a raw deal from its trading partners. The list of offenders starts with China, but it is numerous. Tariffs are the best tool to address that imbalance. On the other hand, Trump the Dow Man loves a booming stock market, which he tracks obsessively, and views it as a form of validation of the success of his administration.

As trade jitters rose, the stock market has become nervous and sold off. Markets hate trade wars, and they hate uncertainty. While Tariff Man and Dow Man can co-exist when trade tensions are low, we will reach some tipping point where Trump has to choose.

Will Trump the Tariff Man or Trump the Dow Man gain the upper hand in the crunch? What are the bull and bear cases?

In the absence of tail-risk, expect Trump to adopt the Tariff Man persona and act tough on China, as well as other trading partners. Should tail-risk appear, either in the form of deteriorating economic conditions or a market slide, Dow Man will become the dominant personality.

This analysis argues for a choppy range-bound market for the next few months, with limited downside risk and restricted upside potential. Under these conditions, investors should re-orient their portfolios to a neutral risk position, and adjust their asset allocation back to investment policy targets. The heightened level of uncertainty is likely to boost volatility, and investors may want to take advantage of this environment by selling covered calls to boost expected returns. It would be a way of getting paid via option premiums while you wait for a resolution of the trade conflict.

Decent enough advice. But for the average investor who wouldn’t know a covered call if she stepped in one, the even-better advice is to set up a nicely balanced, diversified portfolio and forget it for a year or so. Trump may be deeply flawed, but he’s driven and strategic. It’s truly hard to imagine a scenario in which he goes into 2020 with a rerun of late 2018. Thus the riskiest of American presidents is limiting investor risk. At least for a year. Then we need to talk.


Back when Victoria was the Regina nobody paid capital gains tax. No income tax, either. But property taxes were common. Plus customs duties, tithes and even (sometimes) a tax on windows (one reason old houses of a certain period have so few).

These days we tax everything that moves. ‘Carbon’ is the latest. Taxes are due when you make money, spend it, save or invest it. They come with owning real estate, plus when you buy or sell it. And lately there’s been a sizeable amount of confusion about the latter.

For the past few years Canadians have had to report residential real estate transactions and prove they were entitled to an exemption from capital gains tax on a principal residence. Fine. You know what a PR is, of course. House, condo, cottage, cabin, co-op – whatever you normally and habitually live in. During any one year you can designate a property as the PR and pocket profits from its sale without adding half to your taxable income.


A problem arises with rental suites. In fact in Friday’s post when I suggested a confused moister pay her parents rent for carving out a separate space in the family home, the CRA auditors who read this pathetic blog objected. They reminded us that having a rental suite could screw over your chances of a tax-free sale if alterations were made to the house to accommodate the suite (like adding a bathroom or putting in an entry door). True enough. The tax-free status is kaput as well if you claim capital cost allowance (CCA) on a property or if you rent out most of your house and live in only a portion of it.

(In this case – in the real world – modifying a home to shelter an adult child who also happens to gift her parents money to share monthly expenses is not what the CRA cops are worried about.)

As you might know if you’ve ever deal with the revenuers, the rules are fluid, gray, fuzzy and subject to continuous change by both statute and case law. The safest course of action is to not rent out any space in your house. If you do, you must declare the rent and add it to your other sources of income, taxed at your marginal rate. That’s a no-brainer. Not declaring it is tax evasion. If caught, you will fry.

More confusing is this capital gains exemption thing. It’s been assumed for a long time that if you (a) made no physical changes to your property in creating the suite, (b) claimed no CCA and (c) the rental activity was ancillary to the main purpose of the house – your living there – then no erosion of your principal residence exemption from capital gains would apply.

Well, not so fast.

Turns out a recent court case has set the bar lower. A judge ruled a guy with a house outfitted with a basement suite that he never rented, took no income from nor ever offered to any tenant or guest had to pay capital gains on that entire level of his place when he sold. The reason came down to the definition of a home. The judge said it’s where you hang and carry out the daily functions of living. An empty suite (even if in the same building) that an owner does not use therefore doesn’t form part of the home. Any profit made on the real estate must be apportioned to the two areas of the house – the residential part and the unused suite. One tax-free, the other taxable.

Suites are epidemic now, of course. Given the cost of real estate, hauling in a renter is the only way a lot of people can swing home ownership. Vancouver, for example, has the highest proportion of residential suites in North America. But it’s probably a safe bet a huge whack of these amateur landlords are also tax cheats, failing to report the income they use for mortgage payments and property tax. The CRA has one of its famous ‘projects’ set up to ferret out and slap around such households. The interest and penalties – atop income tax owing – can be enough to ruin your day. Or year.

As for capital gains, you can only claim the exemption on a PR by filing out the schedule attached to your personal tax return. Be aware it’s a legal document. No do-overs allowed. And now that all addresses are catalogued with the revenue cops, any property with a rental history is known.

When the principal residence exemption registry was announced the feds fibbed, saying it was another safeguard against foreign owners. But obviously not. In the years to come you’ll understand much better why governments want to know everything about your real estate.

Victoria would not be amused.