Thursday, February 19, 2009

Worthwhile Canadian Initiative

Canadian banks are typically leveraged at 18 to 1--compared with U.S. banks at 26 to 1.
Fareed Zakaria

From the magazine issue dated Feb 16, 2009
The legendary editor of The New Republic, Michael Kinsley, once held a "Boring Headline Contest" and decided that the winner was "Worthwhile Canadian Initiative." Twenty-two years later, the magazine was rescued from its economic troubles by a Canadian media company, which should have taught us Americans to be a bit more humble. Now there is even more striking evidence of Canada's virtues. Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th.

Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn't grown in size; the others have all shrunk.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north. In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian homeownership? It's 68.4 percent.

Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America's by far (accounting for 9.7 percent of GDP, versus 15.2 percent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; "healthy life expectancy" is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America's largest car-producing region.

I could go on. The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal "permanent residents" in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25 points, for instance), he or she can become a full-time, legal resident of Canada.

Companies are noticing. In 2007 Microsoft, frustrated by its inability to hire foreign graduate students in the United States, decided to open a research center in Vancouver. The company's announcement noted that it would staff the center with "highly skilled people affected by immigration issues in the U.S." So the brightest Chinese and Indian software engineers are attracted to the United States, trained by American universities, then thrown out of the country and picked up by Canada—where most of them will work, innovate and pay taxes for the rest of their lives.

If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet—OK, sometimes boring—neighbor to the north. Meanwhile, in the councils of the financial world, Canada is pushing for new rules for financial institutions that would reflect its approach. This strikes me as, well, a worthwhile Canadian initiative.

Thursday, February 5, 2009

NEW!! The Home Renovation Tax Credit


Home renovations are smart investments in the long term value of a home and also create
economic activity by increasing the demand for labour, building materials and other goods. Renovations can also reduce energy consumption and the long-term cost of owning a home.

To provide some $3 billion of much-needed fiscal stimulus and encourage investments in Canada’s housing stock, Budget 2009 proposes to implement a temporary Home Renovation Tax Credit (HRTC).

Temporary, Timely and Targeted Stimulus
The HRTC will apply to eligible home renovation expenditures for work performed, or goods acquired, after January 27, 2009 and before February 1, 2010, pursuant to agreements entered into after January 27, 2009. The temporary nature of the credit will provide an immediate incentive for Canadians to undertake new renovations or accelerate planned projects.

The HRTC can be claimed for renovations and enduring alterations to a dwelling, or the land on which it sits.

How the HRTC Will Work
The 15-per-cent credit may be claimed on the portion of eligible expenditures exceeding $1,000, but not more than $10,000, meaning that the maximum tax credit that can be received is $1,350.

The credit can be claimed on eligible expenditures incurred on one or more of an individual’s eligible dwellings. Properties eligible for the HRTC include houses, cottages and condominium units that are owned for personal use.

Renovation costs for projects such as finishing a basement or re-modelling a kitchen will be eligible for the credit, along with associated expenses such as building permits, professional services, equipment rentals and incidental expenses.

Routine repairs and maintenance will not qualify for the credit. Nor will the cost of purchasing furniture, appliances, audio-visual electronics or construction equipment.

Who Can Claim the HRTC?
About 4.6 million families in Canada are expected to benefit from the credit.

Taxpayers can claim the HRTC when filing their 2009 tax return.

Eligibility for the HRTC will be family-based. For the purpose of the credit, a family is generally considered to consist of an individual, and where applicable, the individual’s spouse or common-law partner.

Family members will be able to share the credit.

Examples of HRTC Eligible and Ineligible Expenditures
• Renovating a kitchen, bathroom, or basement
• New carpet or hardwood floors
• Building an addition, deck, fence or retaining wall
•A new furnace or water heater
• Painting the interior or exterior of a house
• Resurfacing a driveway
• Laying new sod

• Furniture and appliances (refrigerator, stove, couch)
• Purchase of tools
• Carpet cleaning
• Maintenance contracts (furnace cleaning, snow removal, lawn care, pool cleaning, etc.)

Examples of the Benefits of the Home Renovation Tax Credit
The following examples illustrate how homeowners can benefit from the HRTC

• Sally and Ed are a couple who have recently purchased a house. In response to the temporary HRTC, they decide to replace their old windows and improve the insulation in their home in 2009, instead of waiting, incurring $10,000 in expenditures. After taking into account the $1,000 minimum threshold, a 15-per-cent credit will be available on $9,000 in eligible expenditures, providing tax relief of $1,350.

• William and Marie are a couple who are planning to purchase a more energy-efficient furnace for their home, and build a deck at their cottage sometime later. To take full advantage of the temporary HRTC, they decide to do both projects in 2009 rather than waiting. They pay $5,000 for the furnace and $3,500 for the deck. They also decide to have the area around the deck landscaped for $2,500, bringing their total costs to $11,000 ($5,000 + $2,500 + $3,500). Marie claims a credit of $1,350 on the maximum allowable amount of $9,000.

• Karen and Heather are sisters who share ownership of a condominium unit. They each incur $7,500 in expenditures renovating the kitchen in the condo. Karen and Heather each claim a $975 credit on eligible expenditures of $6,500 ($7,500 - $1,000).

How Can I Get More Information?
Additional information on the Home Renovation Tax Credit will soon be available on Canada Revenue Agency’s website at (

Information is also available at

Copies of this brochure are available from the Department of Finance or Service Canada:

Department of Finance Canada

Distribution Centre Room P-135
West Tower 300 Laurier Avenue West
Ottawa, Ontario K1A 0G5
Phone: 613-995-2855 Fax: 613-996-0518

Service Canada
1-800 O-Canada (1-800-622-6232)
1-800-926-9105 (TTY)


Ce document est également offert en français.

Tight credit starts to bite consumers

TARA PERKINS AND LORI MCLEOD From Saturday's Globe and Mail

January 16, 2009 at 9:10 PM EST

The credit crunch, which has already squeezed corporate borrowers, is now trickling through to consumers, with higher interest rates and tighter lending terms. Some borrowers are being notified that rates on their credit lines and cards are going up, and others are having borrowing limits scaled back.

Home buyers taking out a variable-rate mortgage, meanwhile, will find a premium over the prime rate of 70 to 80 basis points, rather than the discount they might have found just six months ago. (A basis point is 1/100 of a per cent.)

While financial institutions in the United States took similar measures last year and banks in Canada have been charging their corporate customers more, the competitive consumer-banking environment in Canada has made it more difficult for Canadian lenders to pass their higher costs along to individual borrowers.

But signs are mounting that financial institutions are going to raise prices on consumer loans, even as the federal government attempts to tackle the thorny issue of credit in its Jan. 27 budget. Ottawa wants to grease access to credit at reasonable prices to keep the economy churning through the downturn.

The price of bank loans is also likely to hit the spotlight Tuesday, when the Bank of Canada is expected to cut interest rates again.Banks are under pressure to reduce rates and lend more at a time when they are worried that more borrowers will struggle with their debts, a concern reflected in their increased provisions for troubled loans.

Bank of Montreal is sending letters to customers notifying them of a 1 percentage point increase in interest on lines of credit. The prime rate has been declining in recent months while the cost of borrowing has risen dramatically for all banks, the letters say.BMO's increase, which affects customers who obtained credit lines before Oct. 15, does not make its products the most expensive in the industry. “From our survey of the market which was confirmed as recently as today, our personal line of credit offering is competitive and in fact favourable compared to some of our major competitors,” a spokesman for the bank said earlier this week. But the move signifies a new willingness among banks to raise rates.

“I think we'll see the rest of the competitors follow suit in some fashion,” said Edward Jones analyst Craig Fehr. “I think this is going to be the first of many product lines that will get repriced.”The banks, which fund more than half of their loans through deposits, are seeking to loosen the vise grip that lower interest rates have placed on their profits.

“Since the banks depend on deposits for much of their funding, if you reduce prime without being able to reduce deposit rates by the same amount, the margin gets squeezed,” said National Bank analyst Robert Sedran. “Increasing the borrower's spread to prime restores some of that lost profitability. You could see more of that behaviour if interest rates continue to fall.”Canadian Tire is raising the rate on its Options MasterCard credit cards by 2 percentage points, effective in March. A number of competitors have already raised rates, said spokeswoman Lisa Gibson.

“In this case, just given the economy and so on, we made the decision to raise it,” she said. Canadian Tire has also reduced the spending limits on accounts that were inactive in order to reduce risk in the company's portfolio, she added. “We also stopped credit limit increases for riskier customers.”

American Express sent letters to a number of Canadians last month informing them the limit on their card had been cut. The company recently tightened some of its criteria, and has increased scrutiny of customer limits in light of the economic environment, said spokeswoman Lauren Dineen-Duarte.

One cardholder, who says she has never missed a payment and has a good job and credit rating, was surprised to receive a form letter from Amex Dec. 24 scaling back her credit limit by more than $16,000.

“These regular reviews are undertaken to protect card members' interests by helping them avoid taking on additional debt that they may not be able to support,” said the letter, which informed the cardholder her limit had been reduced to $1,000.

Ms. Dineen-Duarte said that although “this is an area that is being given increased scrutiny at this time, we have currently only had to take action like reducing credit limits for less than half-a-per-cent of our total card member base.”

She added that Amex carries out its assessments based on the financial information it has on record, including the card holder's spending and payment patterns, and external information it obtains from credit reference agencies.

As Toronto-Dominion Bank chief executive officer Ed Clark pointed out at an industry conference recently, there is new evidence that more Canadian consumers will have trouble repaying their loans. Personal bankruptcies and unemployment are on the rise, and soured loans are expected to follow.

As a result, financial institutions are stepping up efforts to reduce risk in their lending portfolios, and protect profits.

“Will we be able to start to recover, in the lending markets, our cost of lending?” Mr. Clark mused.

“I think every bank is trying to do that, but this is a highly competitive market.”He later added, “We're going through every line of business and saying, ‘Okay, would you make this loan if you assume we're going to have 8 per cent or 9 per cent unemployment?'”

Discounts on variable-rate mortgages, which had become standard during the housing boom but evaporated late last year, are showing no signs of a revival. Lenders are charging about a percentage point above prime on open, variable-rate mortgages with a five-year term. The best current deal is 60 basis points over prime, according to a mortgage broker.

In October, banks and other lenders stopped offering discounts off the prime rate on variable mortgages, and shortly thereafter began charging their mortgage customers a premium over prime.

While rates are historically low, the difference between receiving a discount and paying a premium above prime can translate into a 20-per-cent difference in the biweekly payment amount on a $300,000 variable-rate mortgage.

North American & International Economic Highlights

The current recession will be characterized by de-leveraging by households and corporations. Household credit will be little changed in the course of the coming 12 months, and for the first time in many years the very important debt-to-income ratio will stop rising.

The most notable softening will be seen in the mortgage market. After rising by 12-13% in 2008, look for mortgage outstanding to rise by only 2-3% in 2009. On average, house prices will fall by roughly 10% in 2009 versus the average value in 2008.
Yes, we are in a recession. But like previous recessions this one will also end, and the sun will shine again. Meantime we have to try to understand the nature of this recession and see how we can position ourselves to take advantage of the opportunities presented by the current situation and prepare ourselves for the eventual recovery.
One of the derivatives of the recession is that the savings rate will rise. Households are reducing reliance on debt (which is negative savings), and lower consumer confidence is leading to increase in precautionary savings. Overall, we expect the savings rate to rise to 5% in the coming year. This is a significant increase. And the money will have to go somewhere. In this context the timing of the introduction of the Tax-Free Savings Account (TFSA) is ideal since it provides Canadian with a tax efficient way to park these precautionary savings.
Given the expectations that the economy will start showing some pulse in the second half of the year, and the fact that equity markets tend to lead the economy, there is a growing sense that the coming few months will see a rally in the stock market (some say it is going to be a bear market rally), a fact that might lead to some renew inflow into mutual funds.
In the near-term the bond market might also provide some opportunities. After all, we will have to wait for some further narrowing in spreads and lower rates before we see a notable improvement in the stock market. So in the short-term, the government bond market and potentially the corporate bond market can lead to nice returns.
An addition to the unprecedented efforts by central banks, global governments in general, and in North America in particular, are engaged in a massive fiscal stimulus which will include a combination of tax cuts but more importantly, infrastructure spending. Given that every one billion dollar of infrastructure spending in Canada works to lift the overall economy by close to 0.15% and create no less than 11,500 new jobs, such programs will not only work towards closing the Canada's $120 billion infrastructure gap, but also in providing a badly necessary lift to a recessionary economy. And at the back of this discussion, US and Canadian infrastructure stocks have been rallying recently—in anticipation for a new injection of public money.
Benjamin Tal
Senior Economist – CIBC

Here is the first of a series of videos I will be publishing to keep everyone up-to-date in a new way. You can get your mortgage info through video from your Mortgage Specialist, Neil the Mortgageman McJannet!