canadian tax

2017 CANADIAN BUDGET PREVIEW: Could Feds Provide Tax Breaks to Seniors?

Back in 2015, the Liberals pledged to enhance the Old Age Security and Guaranteed Income Supplement with a new Seniors Price Index. OAS and GIS payments already rise with inflation, but the Liberals noted that, according to a Statistics Canada study, the price of most things seniors buy tends to rise faster, so a new index would help them keep up with the cost of living.

Meanwhile, in its alternative budget, the Canadian Centre for Policy Alternatives suggested indexing OAS to the average industrial wage and salary instead of the CPI to ensure the flat retirement benefit keeps up with earned incomes. The centre also recommended increasing the incomes of the lowest income single seniors by $1,000 by boosting the GIS top-up. Changes to the Canada Pension Plan were already announced by the Feds this summer, but the centre wants to go further, increasing the CPP income replacement rate to 50% of earnings (it’s currently at 25%, scheduled to rise to 33.3% by 2023).

One other possible change to the budget involves extending the retirement age to 67 from 65. The previous Conservative brought in this change when it was in power, and intended to phase it in gradually. But when the Liberals gained power, they promptly reversed the retirement age back to 65. But with more Canadians living and working longer, the change to age 67 might make sense, and the Liberals may be considering an about-face on this controversial issue.

MT Newswires will be providing extensive coverage of Budget 2017, with Ottawa correspondent Doug Watt providing stories from the lockup and filing those stories as soon as the budget embargo is lifted at around 4 pm ET on Mar. 22.

Canadian Coins

2017 CANADIAN BUDGET PREVIEW: Will This Be a “Tax Grab” Budget or Will the Liberals Stay the “Middle Class” Course?

Officials in Ottawa have told MT that there will be no significant changes to personal income taxes in this year’s federal budget. But that hasn’t stopped some experts from speculating that Ottawa will target high income earners in an effort to boost its coffers and reduce the deficit.

One persistent rumour has Ottawa increasing Canada’s capital gains inclusion rate up to as high as 75%, compared to the 50% rate now. Such a move could impact both the TSX and the Canadian dollar, said Gluskin Sheff economist David Rosenberg in a note to clients.

“Capital gains taxes ostensibly are a key source of revenue generation for the Liberal Party — it’s a given,” said Rosenberg.

The economist noted that the government of Pierre Trudeau was the first to initiate capital gains taxes in 1972. The inclusion rate was raised to 75% in 1990, but then later dropped to 67% and then 50% under former Prime Minister Stephen Harper.

Veteran financial analyst Stephen Jarislowsky calls the rumoured plan to increase the capital gains tax another “nail in the coffin” for Canadian investors, particularly at a time when the economic outlook is already relatively weak.

In a commentary in the Financial Post, Jarislowsky noted that based on combined federal and provincial tax rates, personal taxation has already reached a maximum level of 53% of taxable incomes.

“Taxing capital gains without accounting for long-term inflation means severe injury to actual earnings,” he added. “I do not object to paying 25% of any short-term (one-year) capital gain, but when it comes to gains that include a tax on inflation that occurred over long periods of time, it means severe injury to whatever real gain has been earned. The fair thing would be to establish inflation factors to determine real rather than nominal gains, and base a real tax on a real gain.”

The Canadian Centre for Policy Alternatives notes that over 90% of the benefit of the capital gains tax break goes to the top 10% of income earners. The centre argues that capital gains should be taxed at the same rate as employment income.

Financial advisor Cynthia Kett says she’s also heard that the capital gains rate could be taxed at 67% or 75%. “When you go from 50 to 75, that’s a 50% increase, so it could be a major hit for high income earners in particular,” she told BNN-TV.

The current government has signalled in the past that it has no problem taxing higher income earners rather than middle to low income earners, she notes. “It’s low hanging fruit, honestly.”

Kett points to another persistent rumour: the elimination of the dividend tax credit. She says this would have a huge impact on all investors because low rates of return on fixed income investments have people piling into dividend paying stocks.

MT Newswires will be providing extensive coverage of Budget 2017, with Ottawa correspondent Doug Watt providing stories from the lockup and filing those stories as soon as the budget embargo is lifted at around 4 pm ET on Mar. 22.

canadian parliament

2017 CANADIAN BUDGET PREVIEW: Liberals Move to Eliminate Harper-Era Boutique Tax Breaks

The Trudeau government has already started removing a series of relatively minor tax credits introduced by the Harper government, including fitness and arts credits for children. In last year’s budget, the Liberals instead introduced an all encompassing Canada Child Benefit plan, applied to all children rather than just those in specific programs.

Other so-called “boutique” tax breaks that could be on the chopping block include the public-transit tax credit, the tradesperson’s tool deduction and a tax credit for volunteer firefighters and search-and-rescue workers.

In next week’s budget, the Liberals may also consider broadening access to the RRSP Home Buyer’s Plan, expanding the program (which allows you to withdraw up to $25,000 from your RSP with no tax repercussions to buy a home. The funds must be paid back within 15 years) to help Canadians facing a job relocation, the death of a spouse, marital breakdown or who need to accommodate an elderly relative.

The feds may also provide details on its proposal to legalize recreational marijuana use. Any mention of marijuana will likely have a major impact on marijuana stocks, which have been extremely volatile since the government raised the possibility of legalization during the election campaign.

Finally, in a decision that is sure to interest the country’s junior mining sector, Ottawa will likely extend the 15% Mineral Exploration Tax Credit, scheduled to expire at the end of March. Last year, Ottawa estimated the credit would cost $20 million over two fiscal years.

MT Newswires will be providing extensive coverage of Budget 2017, with Ottawa correspondent Doug Watt providing stories from the lockup and filing those stories as soon as the budget embargo is lifted at around 4 pm ET on Mar. 22.

Washington, DC

2017 CANADIAN BUDGET PREVIEW: Trump Turmoil Unlikely to Affect Federal Budget

Since Donald Trump became U.S. president, there’s been a steady stream of Canadian politicians heading south to meet with the new president. However, that doesn’t mean the Trump influence will be felt in the upcoming federal budget, due Mar. 22.

Off the record, Canadian officials told MT that Trump’s campaign pledges on issues like border taxes and reducing corporate and personal income taxes may never come to pass, or could be years down the road.

That’s why Finance Minister Bill Morneau will likely not be influenced by Trump’s proposals, and proceed with the budget plan created before Trump was inaugurated.

“Our budget will be about Canada,” Morneau said recently. “It’ll be about Canadians, and I’m confident that we’ll help Canadians get the skills they need in a challenging economic environment.”

Morneau has already met with his U.S. counterpart, Treasury Secretary Steve Mnuchin, as well as senior White House economic advisers Gary Cohn, Kenneth Juster and Dina Powell, as well as Orrin Hatch, chair of the Senate Finance Committee.

Morneau has apparently concluded that Ottawa will likely have time to assess the situation because it’s still too early to know the fate of many U.S. proposals.

For example, Commerce Secretary Wilbur Ross said that NAFTA negotiations, which are likely to last about a year, probably won’t start before late 2017.

Still, sources say Ottawa plans to remain engaged with Washington to avoid surprises and will closely monitor any signals of change. Just don’t expect any direct influence from Washington in this year’s budget.

MT Newswires will be providing extensive coverage of Budget 2017, with Ottawa correspondent Doug Watt providing stories from the lockup and filing those stories as soon as the budget embargo is lifted at around 4 pm ET on Mar. 22.

Brexit flag combo

MT Newswires Exclusive: Orderly Brexit Would Support US Monetary Policy Decisions, Economic Growth – Stifel

6:28 AM, Jan 19, 2017 — An orderly exit of Britain from the European Union’s single market could have a supportive effect on US monetary policy decisions and economic growth going forwards, brokerage firm Stifel Nicolaus & Co has predicted.

In an exclusive telephone interview held on Wednesday, Lindsey Piegza, chief economist at Stifel Nicolaus & Co, told MT Newswires that the trickle-back effect of a smooth withdrawal of Britain from the world’s largest trading bloc could be beneficial to the US.

“Should the Brexit be smooth and systematic and the UK economy begin to gain momentum, it’s very likely that the Bank of England would eventually join ranks with the Fed toward a further removal of accommodation which in turn would make it easier for the Fed to also engage in a higher interest rate policy if there are other central banks around the world that are also engaging in that type of activity,” Piegza said. “It would help [to] perpetuate a more positive, more normal monetary policy environment if we did see a steady Brexit lead to a pick-up in UK economic activity.”

Acknowledging that the US currency’s relative strength against the euro has been a competitive disadvantage to the US’ exporting sector of late, Piegza said that a further weakening of the euro could yet occur in the event that financial woes among other EU member states were to escalate.

“The biggest reaction that we’re expecting to see from the euro over the near term even as these [Brexit] negotiations are going on, is [to] any indications or further clarity regarding the underlying health of member countries that potentially could be next in line for an exit strategy; so what’s happening with Greece, what’s happening with Italy, Spain,” she said.

“Regardless of the reason, any further currency weakening, be that of the pound or the euro, certainly will serve to only exacerbate the fact that we cannot compete on a global stage from an export standpoint. And weak exports, [a] strong dollar, [and a] hard-hit manufacturing sector – these are three points that very clearly kept the Fed, or at least helped to keep the Fed, on the sidelines through 2016.”

Greece was rescued from the brink bankruptcy in 2015 with a third bailout, worth approximately 85 billion euros ($90.66 billion at current currency rates) from the International Monetary Fund, European Central Bank and European Commission. Since then, the Greek government has faced the challenging task of implementing a series of harsh austerity measures and economic reforms which were required in return for the three-year loan.

Spain, currently in the midst of an economic recovery and continuously grappling with secessionist movements in regions such as the Basque country and Catalonia, endured almost a year without a proper government following two inconclusive elections in December 2015. Political deadlock was only broken last October with Prime Minister Mariano Rajoy being elected for a second-term. Italy’s banking sector is in a vulnerable state and the nation also faces the prospect of an early election. Paolo Gentiloni was appointed as Italy’s new prime minister by Italian President Sergio Mattarella last December following former premier Matteo Renzi’s resignation after Italians voted against constitutional reform in a nationwide referendum the same month.

In the long-term though, Piegza projected that the euro could rally even following changes to the composition of the EU: “It’s a very real scenario that some of these countries [in the EU] facing extreme fiscal difficulties will have to resort to going back to their own domestic currencies in order to inflate the debt away,” she said.

“Near-term, you could see continued weakening of the euro, but I think longer term, if we did see some of these weaker links actually exit and drop out of the euro area, and we see the stronger economies banding together like France, Germany, the Benelux countries, I think ultimately that would be a net benefit for Europe. And once we see a more stable composition, I think the euro would rally through that longer term.”

On Tuesday, British Prime Minister Theresa May confirmed plans for Britain to leave the single market and pursue a new free trade agreement. In a speech delivered before diplomats more than six months after Britons voted to leave the shared currency union in a nationwide referendum, May outlined objectives for what she described as a “phased approach, delivering a smooth and orderly Brexit”.

“I want to be clear. What I am proposing cannot mean membership of the Single Market,” May said. “We seek a new and equal partnership – between an independent, self-governing, Global Britain and our friends and allies in the EU. Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out.”

May’s comments triggered a rally in the value of the pound although the nation’s key benchmark index, the FTSE 100 finished the day lower.

Oil storage

MT Newswires Exclusive: JP Morgan’s ‘A Year of Two Halves’ in Oil

9:14 AM, Jan 9, 2017 — From J.P. Morgan: “today it’s a year of two halves.”

OPEC volatility and shale growth have undermined energy’s ability to outperform for a second consecutive year. Last year, JP Morgan made a fairly controversial prediction that energy would outperform the market for the first time in five years. While the firm remains fairly constructive across the energy landscape in the first-half of 2017, as data points, management commentary and OPEC compliance will likely conspire to draw additional fund flows into the energy sector, the realization that oil prices are capped around $60 per barrel will make it difficult for energy to continue its strong post-OPEC run (+13% XLE vs. 5% S&P since Sept. 27).

Admittedly, the transition from possibility to reality in U.S. politics could lead to a similar trajectory for the market, but as energy stocks move higher, so do the risks, says JP Morgan.

Positioning: “Sell in May and go away”.

*Street Color news alerts are derived from real time conversations with market professionals via the Ask Alyce – Chat Intel service on Bloomberg & Symphony.

Housing Market Updates

MT Newswires Exclusive: Millenials, Black Americans Being Left Out of Housing Boom as Home Prices Soar, Zillow Says

9:32 AM, Jan 5, 2017 — Millennials and African American buyers are being left out of the housing boom as home-cost increases outpace income gains, real estate website Zillow (Z) said in a report ahead of a conference next week.

About 14.5% of older millennials ages 26 to 34 now live at home, up from 12.9% in 2012 due to being “scarred” by the economic downturn and rising home prices, even as the number of younger millennials living with their parents decrease slightly, Zillow said in the report this week.

“Millennials want to own homes and have views about homeownership that are as conservative as their grandparents, but the share of millennials 18-34 living at home with their parents has increased sharply over the past decade,” Zillow said.

The report also showed a wide disparity between black and white home ownership. Blacks are denied loans at more than twice the rate as their white counterparts, and only 41% of African Americans are homeowners versus 72% of whites, the company said in the report. In the third quarter of 2016, full-time workers who were black earned about 23% less than those who were white, according to the Department of Labor.

Home values have soared in the past 20 years in areas with the “most social mobility,” making it difficult for people with low incomes to afford to purchase real estate, Zillow said. The bottom third of income earners spend twice as much of their income on mortgage payments than those in the top third.

Existing home sales in November rose to an annual rate of 5.61 million, the highest level since February 2007, according to the National Association of Realtors. The pace is up 15% year-over-year, the association said. The median existing-home price was $234,900, up 6.8% from the same month a year earlier, the 57th consecutive month of year-over-year gains, the NAR said. The biggest sufferers of rising housing prices: low-income earners, the report said.

“Housing affordability is worst for those making a low income, even if they are living in the cheapest homes available,” Zillow said. “In some expensive markets, those making incomes in the bottom third would have to spend more than half of that income to afford the monthly payment on the cheapest homes on the market. The cheapest homes were most likely to face foreclosure during the housing crisis, forcing those families to rent while their finances were recovering during a decade of the highest rent appreciation in history.”

Wall Street Street Sign

MT Newswires Exclusive: Stocks to Continue Run in 2017 Amid Increased Government Spending, Deregulation, Schwab Says

8:30 AM, Dec 29, 2016 — Expectations for increased government spending, deregulation in some industries and accelerated fiscal stimulus may boost stock prices to new highs in 2017, according to analysts at Charles Schwab (SCHW).

President-elect Donald Trump has said he plans to increase government spending by spending $1 trillion on infrastructure in the next decade. He also has said he will decrease regulations on businesses and has nominated several pro-business candidates to his cabinet including ExxonMobil (XOM) Chief Executive Rex Tillerson and Oklahoma Attorney General Scott Pruitt.

The Trump administration will inherit a strong economy and stable labor market with positive inflation trends that will support several rate hikes next year. The Federal Reserve, headed by Chair Janet Yellen, earlier in December raised its base interest rate by 25 basis points to a target range of 0.5% to 0.75%, and indicated it would raise rates three times next year. Several analysts and economists forecast two rate increases in 2017.

Regardless of how many times rates are raised, the increases could add momentum to the move to stocks from bonds, said Omar Aguilar, Schwab’s chief investment officer for equities and multi-asset strategies.

“US stocks could reach new highs in 2017 amid expectations that Trump’s platform will make additional tax reductions and increased corporate spending possible, potentially leading to stronger corporate earnings growth,” Aguilar said in a note to clients. “This combination may outweigh concerns about political uncertainty and Trump’s protectionist stance.”

If global bond yields continue to improve, investors likely will move from utilties and consumer staples stocks with “overinflated” valuation into cyclical sectors as they’ve been doing recently, he said. The biggest beneficiaries of Trump’s election will be small-cap stocks, financials and industrials, Aguilar said.

Stock indexes that were reading record highs before the Nov. 8 election have continued to push higher with the Nasdaq reaching new peaks this week and the Dow Jones Industrial Average just shy of the 20,000 mark. Investors have said they believe deregulation and an improved business tax climate will boost profits.

Banking shares have benefited from Trump’s ascendence to the Oval Office. Bank of America (BAC) is up almost 30%, Wells Fargo (WFC) shares are up 22% and JPMorgan Chase (JPM) is up 24% since the election.

Globally, developed markets may outperform underdeveloped regions, Aguilar said. Currency volatility likely will continue as inflation expectations and political uncertainty increase amid diverging central bank policies, Aguilar said.

“Developed markets could outperform emerging markets if Europe and Japan continue to recover, while volatility among emerging markets seems likely to continue,” he said.

The fixed-income landscape has changed little in the past year — the Fed hiked rates in December 2015 and again this month. And as with last year, the Federal Open Market Committee predicted several rate hikes in the next 12 months anticipating a faster pace of inflation. Until it arrives, however, the Fed isn’t likely to increase rates rapidly, said Brett Wander, chief investment officer for fixed income at Schwab.

“As we approach the New Year, it may seem like we’re entering a whole new world, but we’re really not,” he said in the note. “Yellen has been dovish for years and we don’t see that changing in 2017, even if Trump doesn’t like it.”

Ten-year treasury yields that ranged from 1.5% to 2% in 2016 likely will rise to 2% to 3% next year, Wander said. US bonds will remain more attractive than those offered by Europe and Japan as long as inflation remains in check, and despite what Yellen and Trump have said recently, there’s been little uptick in inflation, Wander said.

“Be wary of yield temptations and credit risk,” he said. “Next year could prompt investors to reach for higher yields. High-yield and emerging-market bonds may seem tempting, but the risk-reward tradeoff is currently skewed. Many factors could harm these securities in 2017, so we suggest a wary approach to higher yields and a focus on the long-term, instead.”

Oil workers

MT Newswires Exclusive: Rebounding US Oil Output in 2017 Will Begin to Weigh on Prices After First Quarter

8:17 AM, Dec 22, 2016 — US oil production that plunged in 2016 will rebound next year if oil producers continue to bring mothballed rigs back online, Goldman Sachs said this week, which may cause prices to taper off after the first quarter.

Crude output is expected to have declined by 620,000 barrels a day this year even after production companies reopened dozens of rigs as prices climbed since reaching the lowest in almost a decade in February, according to estimates published by investment bank Goldman Sachs. Production is projected by the bank to climb by 120,000 barrels a day in 2017 if the drillers continue to bring rigs back online.

“The backlog of drilled but uncompleted wells remains elevated, and would result in significant upside potential for US production,” Goldman analysts led by Damien Courvalin said in a report this week.

The number of oil rigs operating in the US rose by a dozen to 510 last week, the seventh straight increase and the highest since January, oilfield services firm Baker Hughes said in a report. The rig count figure reached a record 1,609 in October 2014 then fell to a six-year low of 316 in May 2016 as prices plunged, according to Baker Hughes.

Several hundred more rigs remain offline, but putting them back into production may mean subdued prices later in the year, BMO Capital Markets said in a report this week.

Global overproduction in the latter half of 2014, throughout 2015 and for much of 2016 resulted in the price of oil falling to about $26 a barrel in February with devastating consequences for nations whose economic growth relied on crude revenue. The price of West Texas Intermediate crude oil, the main US oil benchmark, fell from a peak of more than $100 a barrel in 2014.

Venezuela, where oil accounts for 96% of exports, slid into a recession in 2014 amid falling oil prices and inadequate macro and microeconomic policies. Gross domestic product in the country contracted by 3.9% in 2014, 5.7% in 2015 and is estimated to have fallen by more than 10% in 2016, according to the World Bank. The country experienced 121% inflation in 2015.

Oil producers, to combat the price declines, took hundreds of rigs offline. Their plan worked as prices have nearly doubled since February.

In November, the Organization of the Petroleum Exporting Countries, whose members collectively generate more than one third of the world’s oil supplies, pledged to collectively lower output by 1.2 million barrels per day starting on Jan. 1, marking the first agreement of its kind in almost a decade. Within a week, major oil-producing nations which were not members of OPEC had committed to lower production by an additional 558,000 barrels per day.

Oil companies benefited from the price increase throughout the year as Chevron (CVX) shares have gained more than 30% in the past 12 months, ExxonMobil stock is up 16% and Schlumberger Limited (SLB) shares have risen 24%.

Companies that produce crude likely will “perform well early in 2017, riding a wave of enthusiasm created by OPEC’s production cut and falling global crude oil inventories” before prices taper off after the first quarter, BMO Capital Markets said in a report this week.

“We expect the wave to dissipate over the course of the year as US producers put more rigs to work,” the analysts said. “We believe that oil prices will generally trade in a $40- to $60-a-barrel range in 2017 with the floor established by OPEC’s shift in strategy and the ceiling by the ability of U.S. producers to add more rigs.”


MT Newswires Exclusive: Fed to Tighten Rates at Accelerated Pace in 2017 Amid Projections for Faster Inflation, Economic Growth

9:26 AM, Dec 15, 2016 — The Federal Reserve said it expects a faster pace of tightening in the benchmark interest rate next year amid prospects for accelerated inflation and economic growth.

The Federal Open Market Committee raised the federal funds rate to 0.5% to 0.75%, the first increase since December 2015 and only the second in almost a decade. The Fed indicated three more hikes of about 25 basis points are on the block in 2017 provided the economy continues to strengthen as it did this year.

The rate increase was “well timed,” said Chad Morganlander, an analyst at Washington Crossing Advisers, though he expects the Fed to hike rates only twice in 2017, and that future increases will be measured.

“Over the next several years we believe the Federal Reserve path to rate hikes will be slow and consistent,” he said.

The US unemployment rate fell to 4.6% in November, according to the Department of Labor. FOMC members on Wednesday projected a median unemployment rate of 4.5% for next year, down from its September outlook for 4.6%. They also expect economic growth of 2.1% in 2017, up from the prior outlook for 2%.

While the FOMC’s view on the labor market and rising inflation were enough to bring on higher rates Wednesday, monetary policy makers were silent about the incoming administration of Donald Trump. Stock markets have surged since the election as investors hope Trump will come through with policies that bolster economic growth and slash taxes.

“In Q&A, Yellen was careful to tiptoe around the fiscal stimulus elephant, which suggests that the Fed’s hand could be forced to be more aggressive down the road, following what marks only the second rate hike in a decade,” Michael Wallace, global market strategist with Action Economics, said in an e-mailed note.

Existing home sales, another indicator of economic strength, rose in October, according to the most recent data from the National Association of Realtors. Sales grew 2% to a seasonally adjusted annual rate of 5.6 million in October, the highest in almost a decade, the association said. The sales pace in the month was almost 6% above the year-ago figure.

Oil prices, which in the first quarter of the year plunged to the lowest in almost a decade, have rebounded throughout 2016 and have recently risen after the Organization of Petroleum Exporting Countries said its members would curb production. West Texas Intermediate futures, the US benchmark, have almost doubled since falling to near $26 in February.

Inflation will rise to the Fed’s goal of 2% in the medium term as the effects of declines in energy and import prices dissipate and the labor market strengthens further, the FOMC said in its statment. Monetary policy remains “accommodative,” which supports further strengthening in the labor market.

FOMC members forecast the median Fed funds rate at 1.4% in 2017, up from a prior outlook for 1.1% and this year’s 0.6%, an indication of three rate increases of about 25 basis points each.

While that projection was “somewhat of a surprise,” according to Francois Genereux, a senior economist with Desjardins, the Fed “has often slashed the scope of its planned monetary firming measures. Our scenarios continue to call for only two key rate increases in 2017.”

Genereux said when the tightening cycle began a year ago, expectations were not for such a long gap between hikes, although the US economy was “disappointing” over that time period.

“Job gains have been solid in recent months and the unemployment rate has declined,” the FOMC said Wednesday. “The committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further.”