Thursday, September 3, 2009

Economic signals turning green as consumer confidence, home sales rise

By Julian Beltrame, The Canadian Press

OTTAWA - Canadians are starting to believe that better times are just around the corner, and that's good news for the economy, analysts say.

The August consumer confidence survey from the Conference Board of Canada shows optimism returning to Canadian households, with the index rising for the sixth consecutive month to the highest level since April 2008, when the economy was firing on all cylinders.

And in a separate report, the Canadian Real Estate Association reported that sales of existing houses rebounded so strongly during the spring and into July that the housing group was dramatically revising upwards its forecast for the year.

"The difference in the resale market now, compared to the beginning of the year, is night and day," said president Dale Ripplinger, in increasing CREA's projection for sales this year to 2008 levels, from a previously thought 14.7-per-cent decline.

As well, the real estate body forecasts the general prices of homes across Canada will rise 1.5 per cent this year, a stark contrast to the situation south of the border, where both prices and sales have collapsed.

Both indicators were below levels that existed in 2007 when the economy was booming and the horizon contained few warnings of forthcoming turbulence, but they do support the general view that the sharp economic slide of the winter and spring has stopped.

They also coincide with the recent slowdown in job losses and steady growth in the retail sector, including June's surprise one per cent increase in sales.
Since October, 414,000 jobs have vanished in Canada, but the majority of the losses occurred in December, January and February.

Economists don't often get excited about consumer confidence surveys, mostly because they often reflect the economic news rather than predict future behaviour.

Douglas Porter of BMO Capital Markets said the latest survey is worth noting, however, because of its timeliness, and its track record in accurately predicting last winter's consumer spending slump.

"Given that the consumer confidence survey is the first piece of data we have from August, it's at least a hint that maybe some of the other indications we're going to see later on - spending, perhaps even employment - are going to be better than expected," he said.

The survey, conducted between Aug. 6 and 16, raised the consumer confidence index by 5.5 points from July to 88.4, the highest reading in almost a year and a half. Confidence has risen 18.2 points since the beginning of the year.

Another good sign was that all components of the survey showed gains: more respondents were upbeat about their near-future financial prospects, fewer were pessimistic about job prospects, and a plurality said it was a good time to make big purchases, such as a car or home.

On the critical jobs question, 25.6 per cent of respondents said there will be fewer jobs available in the next six months, a huge improvement from the 54.5 per cent who felt gloomy about jobs prospects six months ago. Twenty-one per cent felt there would be more jobs six months from now, an increase of over six percentage points from July.

"In general we see this as good news," said Todd Crawford of the Conference Board. "In terms of going forward, as people become more optimistic and they go out and spend more money, that is good news for the economy." -

The perils of writing off the mortgage

Jamie Golombek, Financial Post

It has been nearly six months since the Lipson decision, in which the Supreme Court of Canada effectively blessed the debt-swap strategy known as the "Singleton shuffle." But a new court decision reminds us how critical it is when rearranging your debt to do so legally.

After all, in Canada, it's nearly impossible to write off your mortgage interest without some advance planning.

The Singleton shuffle, named after Vancouver lawyer John Singleton's 2001 Supreme Court victory, stands for the notion that you can rearrange your financial affairs to make the interest on investment loans tax-deductible. How you do that is by replacing non-deductible debt with tax-deductible debt.

The case decided last month involved Nina Sherle, who owned a rental property (Property A) with a mortgage on it upon which the interest was deductible. She also owned a personal residence (Property B) free and clear.

She wanted to switch properties. In other words, she wanted to live in Property A as her personal residence and rent out Property B. She stated she didn't want to change her financing strategy, which was to live in her personal residence (soon to be Property A) mortgage-free.

To accomplish this, she mortgaged Property B to pay off the loan on property A. As a result, she was now making interest payments on the new mortgage secured by Property B. She deducted this interest on her tax returns but was reassessed by the Canada Revenue Agency.

The CRA argued that for interest to be deductible, one must look to "the actual, direct use of the borrowed funds" and whether such use was for the purpose of earning income.

Since the mortgage proceeds were used to pay off the loan on Property A, which was to be a personal residence, not an income-producing property, the interest was not taxdeductible.

The judge in the case agreed. He wrote: "Why funds are borrowed is irrelevant.... It is the use of the funds that governs [the decision]. In the present case, the required link between the use of the proceeds and the income-producing property is just not there."

In a twist, the judge went on to describe what Ms. Sherle could have done to permit the interest to be deductible. While somewhat complex, it essentially involves Ms. Sherle selling Property B to a friend in return for a promissory note.

The next day, Ms. Sherle could have borrowed money from the bank to pay off the mortgage on Property A. She then could buy back Property B from her friend, financing that purchase through a mortgage on Property B.

Her friend would take the proceeds from the sale of Property B and use them to repay the promissory note. Finally, Ms. Sherle would use the proceeds from the promissory note to pay off the bank loan.

Confused yet? The end result is that only the mortgage on Property B would be outstanding. The interest should be taxdeductible since the direct use of the mortgage proceeds was to buy the rental property. - Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director of tax and estate planning with CIBC Private Wealth Management in Toronto