Tag Archives: home equity

Darren Coleman interviews Tax expert Kim Moody about Liberals floating tax on Home Equity

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Darren Coleman (left) and Kim Moody (right, with glasses).

The following is an edited transcript of an interview conducted by financial advisor Darren Coleman’s of the Two Way Traffic podcast with tax expert Kim Moody, of Moody Private Client. It appeared on August 8th: click here for full link.

Moody recently wrote an article in the Financial Post about the government flirting with the idea of a home equity tax, even on principal residences. Such a tax could result in an annual levy of about $10,000 for a home worth $1 million. He described that, along with the increase in the capital gains inclusion rate that has already passed into law, “really bad tax planning” based on ideology, not economics.

In the podcast Moody and Coleman also discussed …

  • The disparity between U.S. and Canadian tax rates, beginning with how the state of Florida compares with Ontario, a difference of 17%.
  • The tax model established in Estonia lets you reinvest in your company without paying corporate tax while personal income is taxed at a flat rate of 20%. They say such a system would work in Canada, and celebrate success and entrepreneurship.
  • What organizations like the Fraser Institute and mainstream economists think about Canada’s economic performance.

Below we publish an edited transcript of the start of the interview, focusing on the capital gains inclusion rate and trial balloon about taxing home equity.

Darren Coleman, Raymond James

Darren Coleman:  I’m Darren Coleman, Senior Portfolio Manager with Raymond James in Toronto.  I’m delighted to be joined by Kim Moody of Moody’s tax and Moody’s private client. You’re also a law firm based in Calgary, Alberta, and probably one of Canada’s best known tax and estate planning advisors. You may have heard our last conversation with Trevor Perry  about some of the issues we might be seeing in terms of taxation of the principal residence in Canada.

I think because governments have spent so much money that we’re going to see tremendous innovation in taxation.  Do you want to set the table for the article you wrote in the Financial Post, where you talked about where this is coming from, and why Canadians might be on alert for what might be coming to tax the equity in their homes.

Kim Moody: The point of the piece was mainly just to put Canadians on notice that you had the Prime Minister and the finance minister sitting down with what I call a pretty radical
think tank.  I consider them an ideological bastion of radical thought but that issue aside,
they call them call themselves a think tank, and this particular one, led by Paul Kershaw of
Generation Squeeze, has stuff on their website that pretty much attacks older Canadians:
basically saying they’ve gotten rich by going to sleep and watching TV. Unbelievable. Whoever approved that, it’s just so offensive. But that issue aside,  the whole connotation of the messaging is that, hey, these people are rich. We’ve got these poor young Canadians who are not rich and they can’t afford houses because you’re rich and …

Darren Coleman Someone should do something about it, right? That’s the trick.

Kim Moody

Kim Moody: Someone should do something about it. And their solution is to introduce a so-called Home Equity tax on any equity of a million dollars or more. And they call it a modest surtax of 1% per year. So it’s like another, effectively property tax … It’s just so nonsensical and so offensive on a whole bunch of different levels. Like you think about grandma and grandpa, yeah, they’ve got equity in their homes, but they don’t have a lot of cash. They’ve been working hard their entire lives to pay off their houses. And yes, they want to transfer down to their kids at some point, but right now, they’re living again, and they’re making ends meet by living off their pensions that they worked hard, and you’re expecting them to shell out more money for that, and I find that offensive.

…. Back to the original premise of why I wrote the article:  to let Canadians know that our leaders are entertaining stuff like this. It doesn’t mean they’re going to implement it, but they’re actually entertaining radical organizations like this and secondly, just to put Canadians on
notice that this is just the beginning. If this regime continues with out-of-control spending and no
adherence to basic economics, then we could expect a whole bevy of new taxes.

Darren Coleman  

Indeed, they’ve already done some of this, right? So you know that this idea about we’re going to tax home equity, either through some kind of annual surtax on equity over a certain amount, or we’re going to put a capital gain on principal residences. And I would argue that for years now, Canadians have had to report the sale of the principal residence on their tax returns, which is a non-taxable event, yet you now have to tell them, and if you don’t, there’s a penalty. Continue Reading…

The retirement landscape in Canada

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By Bob Lai, Tawcan

Special to Financial Independence Hub

The retirement landscape in Canada
Image courtesy Tawcan

Recently I wrote about what we’re doing in this bear market condition. Since we’re still in our accumulation phase, we’re following our investment strategy by continuing buying dividend stocks and index ETFs regularly and building up our dividend portfolio.

But what if you’re closer toward retirement or already retired? How do you protect yourself from the bear market so make sure you can sustain your expenses in retirement? What is the ideal retirement portfolio for Canadian? Should someone simply try to aim to build a dividend portfolio and live off the dividends? To answer this complicated question, I thought it’d be best to ask an expert. So I decided to reach out to Dale Roberts to talk about the retirement portfolio for Canadians.

For those who don’t know Dale, he is a former investment advisor and trainer with Tangerine. He now runs Cut The Crap Investing and is a regular contributor to MoneySense.

Please take it away Dale!

Thanks Bob.

The typical retirement is likely a thing of the past. Yours will not be your Mom and Dad’s retirement and it certainly won’t look much like Grandpa’s either. The traditional model of a workplace pension plus Canada CPP (Canada Pension Plan) and Old Age Security payments plus home equity won’t likely get the job done.

In previous generations many would work until age 65 and with life expectancy in the mid to upper 70s, the retirement was short lived, meaning that long-term inflation was not the threat it is today. And those workplace pensions were commonplace. A retiree could sit back knowing those cheques were coming in on a regular basis, and those pension amounts were often adjusted for inflation.

According to Statistics Canada the Life expectancy in Canada has improved considerably. Women’s life expectancy at birth has increased from 60.6 years in 1920–1922 to 83.0 years in 2005–2007, and men’s life expectancy from 58.8 to 78.3 years in the same period—increases of 22.4 years for women and 19.5 for men.

A Canadian male who makes it to age 65 will on average live another 20 years. It’s even longer for women. Many will live to age 90 and beyond. We all assess our own longevity prospects, but it may be prudent to plan for a retirement of 25 to 35 years. If you opt for an early retirement, your portfolio (and any pensions) might have to support you for 40 or 50 years.

A sensible retirement plan will work to make sure that you don’t outlive your money. You will also likely want to pass along wealth to children, grandchildren and charities. Estate planning and leaving a meaningful legacy will be a priority for many Canadians.

The pandemic has made Canadians rethink many areas of their lives. Our own mortality became a concern. For good reasons, during the pandemic more Canadians have sought out meaningful financial advice. They recognize the need for proper insurance, investments that can stand the test of time and a well-thought-out financial plan that ties it all together.

You don’t get a second chance 

It all adds up to greater peace of mind. There is that popular expression from Benjamin Franklin:

If you fail to plan, you are planning to fail

 

When it comes to retirement, that plan is essential. You don’t get a second chance.

Retirement building blocks 

The traditional building blocks of a secure retirement will be insurance, plus cash flow from savings and a well-diversified investment portfolio, plus government and company pensions. Income from investment properties are often in the mix.

Annuities offer the ability to pensionize more of your nest egg. Thanks to product innovation Canadians can add a pension-like component with a revolutionary new offering such as the Longevity Pension Fund from Purpose Investments.

Canadians who might have missed out on a workplace pension can fill that void. It operates like a pension fund with mortality credits. That is, it protects the risk of longevity as plan members who die sooner will top up the retirement of those who live to a very ripe old age.

  • Insurance
  • Cash
  • Pensions, public and workplace
  • Old Age Security (GIS for lower income)
  • Retirement portfolio
  • Annuities and investment pensions
  • Real estate and other
  • Part-time work
  • Inheritance

The retirement portfolio 

Historically, simplicity can work when it comes to building the retirement portfolio. That is to say, a simple balanced portfolio that owns stock market funds and bond market funds will do the trick.

The famous, or infamous 4% rule shows that a 60% stock and 40% bond portfolio can provide a 4% (or slightly more) spend rate that will support a retirement of 30 years or more.

Note: a 4% spend rate suggests that 4% of the total portfolio value can be spent each year, with an increase at the rate of inflation. The 4% rule is more of a rule of thumb to help you figure out how much you need to save and invest to hit your magic retirement number. This video demonstrates why no one really uses the 4% rule.

And here’s my video on the simple retirement portfolio.

You’ll find examples of these core balanced portfolios on my ETF portfolio page. You might look to the Balanced Portfolio with More Bonds and the Balanced Growth Portfolio as potential candidates for a core retirement portfolio. There are also the all-in-one asset allocation ETFs.

I would suggest that the traditional balanced portfolio can be improved with a cash allocation and dedication inflation protection. You might consider the Purpose Diversified Real Asset ETF, ticker PRA on the TSX. The cash will help during periods of extended bear markets. In 2022 saw how stocks and bonds can fall together in a rising rate environment.

Given that you might consider for a simple balanced model:

  • 50% stocks
  • 30% bonds
  • 10% cash
  • 10% PRA

But Canadians love their dividends

While a core ETF portfolio might do the trick, most self-directed investors love their dividend stocks and ETFs. That’s more than fine by me.

In fact, building around a core Canadian stock portfolio is likely a superior approach for retirement funding. Thanks to wide moats (lack of competition) and oligopolies, Canada is home to the most generous and retirement-friendly dividends on the planet.

That said, don’t sell yourself short by only living off the Canadian dividends. Total return matters and dividend investors should always consider selling some shares to supplement their dividend income and for tax efficiency purposes.

Tawcan: Can’t agree with you more Dale! Selling some shares later on during your retirement will help with estate planning as well. I’d say living off dividends and not touch your principal early on during your retirement may provide some margin of safety.

Dale: My Canadian core stock portfolio provides a generous and growing (though not guaranteed) income stream and a defensive stance. I call it the Canadian Wide Moat 7. Bob always has listed some top Canadian dividend stocks to consider as well.

To boost the yield you might also consider some Canadian Utilities as bond proxies (i.e. replacements). And certainly, thanks to the defensive telcos, utilities and other defensives, you might go much lighter on any bond allocation.

I recently posted on building the defensive big dividend portfolio for retirement.

I prefer dividend growth stocks for the U.S. allocation. In the post below you’ll find our (for my wife and me) personal stock portfolio, and how the Canadian stocks work with the Canucks. The portfolio offers generous market-beating returns with a more total portfolio defensive stance.

consumer staples info
Source: Dividend Growth Investing & Retirement 

To generate modestly better retirement funding (compared to core balanced index portfolios) we can boost the dividend stream, and hold a greater concentration in defensive stocks.

We’ll find that defensive nature in telcos, pipelines, utilities, healthcare and consumer staples. U.S stocks help fill in those Canadian portfolio holes as we find wonderful healthcare and staples stocks south of the border. The U.S. offers ‘the best companies on the planet’ – my sentiment. And many of those companies are in the technology and tech sectors. It’s a great idea to add growth in retirement, but we do want to make sure that we are defense first.

Tawcan: Yup, since the Canadian market is very financial and energy heavy, investing in U.S. stocks will help with sector diversification.

Dale: On the defensive front, I’d throw in Canadian financials as well – they will offer up those generous, and mostly reliable dividends. And yes, you might also consider international, non North American ETFs. I prefer to mostly get my international diversification by way of the U.S. multinationals.

While not advice, my personal portfolio shows how easy it is to build a simple retirement stock portfolio. As you can see from that above post, we also hold other assets in moderation – including cash, bonds, gold and other commodities plus oil and gas stocks. Continue Reading…

Tips for Buying a House for those with Poor Credit

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Image Pixabay

By Brittany Cotton

Special to Financial Independence Hub

For people with bad credit, the experience of buying a home can be quite difficult and daunting. It’s a tricky time that necessitates careful planning and preparation.

However, despite the difficulties that low credit scores may present, there are several tips and strategies you can employ to help you navigate the home-buying process. This article highlights some of these innovative strategies.

How to Buy a Home with Less than Stellar Credit

Here are some pointers to help you buy a home even if you have bad credit:

Consider Special Programs

There are numerous loan programs that do not require a high credit score or a down payment if you are a first-time homebuyer or have a low income. Some options [in the United States] to consider include USDA loans, VA loans, and the Fannie Mae HomeReady and Freddie Mac HomeOne and Home Possible loan programs.

Look for the Best Deal

Different mortgage brokers offer various rates of interest, so shop around to find the best deal. According to studies, trying to compare multiple rate quotes could save you a substantial amount of money in the long run.

Look into Down Payment Assistance

If you’re concerned about saving for a down payment, there are more than 2,500 down payment support programs available across the country for which you could be eligible. However, you need to avoid major financial changes. Taking on new debt or making a large purchase can lower your credit score, so avoid doing so while applying for a mortgage.

Things you should know about the Homebuying Process

Before you start looking for a house, you should educate yourself on the ins and outs of house purchases. Here’s a rundown of some key points to keep in mind:

Recognize why you want to Buy a House

Buying a house is a significant investment that shouldn’t be taken lightly. If you don’t know why you would like to buy a house, you may come to regret your decision later on.

Check your Credit Score

Your credit score will help you in evaluating your payment plans; lenders use it to set loan pricing and determine if you can repay your mortgage. The more favorable your credit history, the better your chances of obtaining financing at the best terms and rates. Continue Reading…

Buying a House in Canada: Why I couldn’t wait to NOT be a Homeowner

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By Kyle Prevost, MillionDollar Journey

Special to Financial Independence Hub

By the end of the summer of 2021 I was no longer a homeowner.

In many countries that statement would be a simple matter of personal finance. Selling an asset, paying off a loan (mortgage) and moving on to another living space.

But not in Canada.

No, in Canada selling our house means that my wife and I are making a massive change to our identities. A core shift in our very essence.

Many would say we are taking a careless step backward on the path to living a fulfilled “real adult” life.

Several friends and family will likely believe that we are crazy for tossing away “the best investment one can ever make.”

The absolute obsession with homeownership in Canada continues to astound me. The emotional connection between Canadians and their real estate has been well documented, but that doesn’t make it any more logical! Even though my wife and I have owned a home for years, this was much less because we subscribed to the traditional “own at all costs” mentality, and more due to the fact that rural Manitoba housing vs rent decisions are quite different than most places in Canada.

We’ll certainly miss some of the small luxuries (goodbye big garage) of our old home, but here’s some of the reasons why we believe selling our house will be a weight off of our shoulders.

1.) Endless Fear of Hearing a Strange Noise

Is that the furnace taking its last breath?

Perhaps it’s the water treatment system deciding to spring a leak?

Is that rain I hear – is it possible our septic system is backing up?!

My dad loves fixing stuff.  His day is not complete until he has improved the physical world around him.

I am not my dad.

My lack of handyman skills has now become a joke that I’m comfortable laughing at, but for years I was incredibly self-conscious about possessing nearly zero masculinity-affirming fix-it ability. You want someone to work hard doing menial chores such as cutting lawns, raking leaves, shovelling snow, or lifting heavy things from Point A to Point B – I got you covered.

Anything that requires technical skills or mechanical problem-solving ability… not so much.

Because my father’s handyman-dominant brain was not passed down to his oldest son, I lived in perpetual fear of things breaking when I owned a home. I never really got this “pride of ownership” thing. For me it was definitely more of a “fear of ownership”. I had so much of my net worth tied up in this one asset – that required constant maintenance – and I really had no idea what it was doing. “Learning by doing” constantly scared me as errors were quite costly.

Hiring any specialized help on something like an air conditioning unit always seemed to cost triple what was estimated, so that just exponentially added to my anxiety levels around maintenance.

Renting = not my problem!!!

2.) Renting is Simply a Better Financial Decision Than Buying – in 2021 Canada.

I know … that’s a big statement.

It’s probably worth an article all on its own.

It will probably lead to crazy comments (as all real estate articles in Canada do).

But it’s quantifiably true.

We’ll get into the “fringe” elements of why owning can be so expensive in a second, but for now let’s just look at the direct dollars and cents comparison.

Before we get too deep into this, I don’t want to argue with you unless you have viewed the following content by some of Canada’s smartest personal minds.

i) Preet Banerjee compares renting a house and renting a mortgage and then explains why he is a renter.

ii) John Robertson (my vote for most underrated personal finance philosopher – and it’s not even close) tells you why he is a renter and presents the best rent vs buy calculator that I’ve ever seen.

iii) Here’s Ben Felix’s 5% rule in action. I personally believe that Ben is shooting a bit high on real estate estimates (today’s giant houses are not comparable to historical returns data he quotes), and a bit low on property taxes + maintenance costs. He also isn’t factoring in closing costs (which are a pretty big deal when you move the number of times the average Canadian does), nor the difference between renters insurance and home insurance. I do like his methodology, but the 5% rule of thumb for non-recoverable costs is pretty badly slanted towards real estate due to the factors mentioned above. I could probably live with a 6% rule – but find a 7% rule to be a much more true measure (speaking as a soon-to-be former homeowner of ten years).

iv) I’ve talked to many real estate experts who claim “the 1%” rule of thumb is a great filter for a potential landlord looking to add a revenue-generating property to their real estate portfolio. That means that if you can’t get at least 1% of your purchase price in monthly rent, then it’s not really worth considering the property. The flip side of that is that if you’re renting for substantially less than 1% of the purchase price of a comparable home – then you’re getting a good deal. Bryce over at Millennial Revolution explains his rule of 150 which comes to similar conclusions.

Those are all great looks at accurately comparing financial costs vs benefits of purchasing a house to live in.

So, let’s use them to look at a few options across Canada at the moment.

Toronto Real Estate

The average price of a property sold in the GTA in May of 2021 was $1,108,453 (a massive 28% gain over a year earlier) while the average rent is closer to $2,100 (down 14%).

  • Our 1% rule of thumb says that a $1,100,000 house better get you $11,000 per month in rent – or it’s not a good buy.
  • Using John’s or Preet’s calculators we see that renting is WAY ahead given these parameters.
  • My modified Ben Felix 7% rule tells us that if we can rent for $6,466 – then it’s a pretty good deal to rent.  If we stick to his original 5% rule, we need to rent for less than $4,618 to be a good deal.
  • Bryce’s preferred rule of 150 means that the $2,100 rental average, would dictate a mortgage payment of $1,400 as a good measuring stick for if they should buy.  A $1,400 mortgage (HAHA – good one) would correlate to a purchase price of roughly $350,000 (depending on a few variables.

Conclusion: By any measure… this makes no sense.

Buying a House in Calgary

Maybe this is just a Toronto thing. Let’s go to a city that has seen its housing market really fall on tough times as a result of the oil collapse, PLUS rent has actually gone up over the last year.

The average rent in Calgary is roughly $1,200 and the average cost of a property is $510,000. Those stats might be skewed a bit by average home type in the rental world vs average home type in the purchase world. Let’s say average rent for comparable might be $1,500.

  • Our 1% rule of thumb says that a $510,000 house better get you $5,100 per month in rent – or it’s not a good buy.
  • Using John’s or Preet’s calculators we see that renting is substantially ahead given these parameters.
  • My modified Ben Felix 7% rule tells us that if we can rent for under $3,000  – then it’s a pretty good deal to rent.  If we stick to his original 5% rule, we need to rent for less than $2,125 to be a good deal.
  • Bryce’s preferred rule of 150 means that the $1,500 rental average, would dictate a mortgage payment of $1,000 as a good measuring stick for if they should buy or not.  A $1,000 mortgage would correlate to a purchase price of roughly $230,000.

Home Prices in Halifax

Ok, enough of these “big city places”. We all know that house prices are way cheaper on the East Coast, so let’s run the numbers for Canada’s semi-hidden gem of a city.

The average rent in Halifax is about $1,600 per month and the average cost of property is $465,000.

If we adjust upward to $1,800 in allowing for comparable properties (I checked, you can rent a solid single-family unit for 1,800 in Halifax – even better in Dartmouth, Nova Scotia) then we get the following analysis.

  • Our 1% rule of thumb says that a $465,000 house better get you $4,650 per month in rent – or it’s not a good buy.
  • Using John’s or Preet’s calculators we see that renting is substantially ahead given these parameters.
  • My modified Ben Felix 7% rule tells us that if we can rent for under $2,700  – then it’s a pretty good deal to rent.  If we stick to his original 5% rule, we need to rent for less than $1,937 to be a good deal.
  • Bryce’s preferred rule of 150 means that the $1,800 rental average, would dictate a mortgage payment of $1,200 as a good measuring stick for if they should buy or not.  A $1,200 mortgage would correlate to a purchase price of roughly $280,000.

…that’s why I’m not afraid to be a renter the rest of my life and why I’m not worried about “hopping off” the property ladder.

If you’re still not convinced, here are a few more stats for you.

  • Canada’s current price-to-rent levels are 574% higher than they were in 1970.
  • Since 1970, Canada’s price-to-rent level has risen at roughly 21x as quickly as the USA’s.
  • Canada’s current price-to-rent levels are substantially higher now than the USA’s was before their 2008/09 housing crash.

3.) Opportunity Cost of Being Rooted Into Place

I grew up in a single house – owned by a homeowner. (My parents were unique in that my dad built his own house on a very cheap piece of rural land and never took out a mortgage. Feel free to try and copy that strategy in 2021.)

It was really nice. I get that there can be some very pleasant reasons to own the house/condo that you live in.

But let’s be honest about the big picture here – there are some large trade offs involved.

Buying a home makes you much less likely to move in order to accept a promotion or career opportunity. That’s impossible to quantify, but it’s a really significant consideration. One of the quickest ways to climb in any industry (or even make an advantageous jump to a new industry) is to be willing to move to where the opportunity is. The cost to your career of feeling as if you are anchored to the house you worked so hard to get into could be massive!

4.) Our Brains Work Differently When We Think About Renting a Place to Live vs “Buying a Forever Home” – Lifestyle Inflation is Almost Inevitable.

Funny things begin to happen as we approach the leap from renter to homeowner.  Suddenly, cost-benefit calculations we were doing about third bedrooms or fancy kitchens fly out the window… only the best will do for our “forever home” after all.

Weird mantras like, “We’ll grow into it,” begin to creep into our heads and suddenly we’re looking at fancy countertops, upgrading bathrooms, etc. Continue Reading…

Your home and your retirement plan

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By Anita Bruinsma, CFA, Clarity Personal Finance

Special to the Financial Independence Hub

“Your home should not be your retirement.”

This is a common headline in personal finance and although the details are nuanced, the headline can give the wrong impression: that you shouldn’t rely on the equity in your home to fund your retirement.

Certainly, it shouldn’t be the only source of retirement income: homeowners also have to save using RRSPs and TFSAs. However, homeowners in high-priced housing markets will likely have excess equity in their homes that should be considered when building a retirement plan and determining how much they need to save.

The rationale for the “don’t rely on your home for retirement” advice is twofold: first, that you will always need a place to live and the value of your home will be needed to buy or rent another residence; and second, that you need money to buy food and other things, which you can’t do if all your wealth is tied up in your home.

Both these points are valid, but they don’t apply to everyone. Like all aspects of financial planning, each individual’s personal circumstances need to be considered and in fact, many people should count on their home to help fund their retirement.

You’ll always need a place to live

To address the first point — that your current home will fund your next home — consider doing an analysis that looks at the cost of renting for the years after you sell your home. For those in high-priced housing markets like Toronto, the proceeds from selling a mortgage-free home will likely more than offset the cost of renting for 30 years in retirement, including paying for long-term care. The same analysis applies to downsizing by buying a smaller place in a less-expensive market. This means there could very well be excess funds that can be used later in life and this should be accounted for when determining how much retirement savings you need. Continue Reading…