May 2025 Poll

Does the Liberal promise expected soon to cut the lowest personal income tax rate by 1% to 14%,  go far enough to help Canadians impacted by high costs?

The picture for 2012 that the Bank of Canada Monetary Policy Report paints is of a Canadian economy constrained by a fragile global economy and dependent on continued, strong household spending. And, although inflation is expected to stay around 2% in 2012 and into 2013, too much or too little household spending could dislodge that outlook. Canadians have voiced their concerns about rising inflation (Knowledge Bureau Report, Jan. 11) but all indications are inflation poses little threat in 2012. Statistics Canada this week reported a 2.3% rise in the consumer price index (CPI) for the 12 months to December, on the back of declining gas prices. Bank of Canada's core inflation ó which excludes eight of the more volatile components of the CPI ó was 1.9% in 2011. Says the Bank of Canada in its report: "Core inflation is projected to moderate through 2012 to a level somewhat below 2%, as excess supply persists and the effects of higher prices for food and clothing on year-over-year inflation unwind. Total CPI inflation is projected to continue to decline to around 1.5% by mid-2012, reflecting lower core inflation as well as the gradual impact on gasoline prices of the decline in world oil prices from their peak in the second quarter of 2011. Both total and core inflation are expected to start to rise gradually by the end of 2012, reaching 2% by the third quarter of 2013 as excess supply in the economy is slowly absorbed, the growth of labour compensation increases modestly and inflation expectations remain well anchored.î The Bank, however, cites three upside risks to that scenario: climbing global inflation, stronger-than-expected U.S. growth and too much household spending. Risks on the downside are failure to contain the European crisis and too little household spending. So, how did household spending end up a linchpin of our economic stability? It wasn't so long ago that both the Bank of Canada and the International Monetary Fund were expressing concern about the levels of household debt. At the end of 2011, Canadians' household debt as a percentage of disposable income had surpassed 150%, giving the IMF reason to worry. Likewise in a Dec. 12 speech in Toronto, Bank of Canada Governor Mark Carney talked about "reducing our economy's reliance on debt-fueled household expenditures.î But, later in his speech, Carney also noted: "To eliminate the household sector's net financial deficit would leave a noticeable gap in the economy. Canadian households would need to reduce their net financing needs by about $37 billion per year, in aggregate. To compensate for such a reduction over two years could require an additional three percentage points of export growth, four percentage points of government spending growth or seven percentage points of business investment growth.î What has become clear is that those alternatives may not be available. With the worsening global outlook and slowing U.S. growth, Canada is not likely to see much in the way of export growth. Governments are facing mounting deficits, the result of recession-fighting incentive programs, and are cutting spending. Businesses, although in good shape financially, are taking a cautious approach to investment spending given the global outlook and will no doubt fall short of that seven-percentage-points goal. So, it comes back to household spending. Says the Monetary Policy Report: "Confidence effects stemming from the weaker and more uncertain global outlook are projected to exert only a modest dampening effect on Canadian household spending. Reflecting the upwardly revised profile for residential investment, household expenditures are now expected to remain high relative to GDP over the projection horizon and the ratio of household debt to income is projected to rise further.î What does Canadian household spending look like? According to StatsCan's 2009 Survey of Household Spending (the most recent data available), average household spending in Canada was $71,120. That average household spent 20.2% of its income on personal taxes, 19.8% on shelter, 13.7% on transportation and 10.2% on food. That left 36% for other spending. At each end of the spectrum, the one-fifth of Canadian households with the lowest income spent an average of $23,860 in 2009 while one-fifth of households with the highest income spent an average of $147,090. The lowest-income group spent almost 52% of that on food, shelter and clothing while the highest-income group allocated 27%. Personal taxes, on the other hand, represented 2.8% of the lowest-income household's budget and 30% of the highest-income household. Canadian's did cut back marginally on discretionary spending in 2009. Spending on household furnishing and recreation declined; for example, spending on snowmobiles fell 11%.

Preparing your income taxes when your tax records are helter-skelter is a difficult, frustrating and exasperating task. To assure yourself of better results come tax-filing time, make January the month you organize not only last year's records, but also this year's. Under the Income Tax Act, you are required to provide books and records to the Canada Revenue Agency, if asked, for a period of at least six years, which starts at the end of the tax year to which the records relate. That means 2011 records must be kept until Dec. 31, 2017. But some records and supporting documents must be kept indefinitely, including records documenting the acquisition and disposal of property, share registries, capital loss balances and other important historical information that can affect future tax returns or have an impact upon the net tax results from the disposition or wind-up of a business. The consequences of not having the appropriate records on hand can be onerous. (See CRA Information Circular 78-10). For example, if you fail to provide information or documents requested by the tax man, section 231.2 of the Act gives the government the power to require you to provide that information or documents. If you fail to maintain adequate books and records or provide the information or documents, CRA can bring a summary conviction and prosecute you. If it wins, in addition to any penalty otherwise payable, you may be subject to imprisonment and/or a fine not less than $1,000. Alternatively, the CRA can apply to the court for a compliance order, in which a judge orders you to provide access, assistance, information or the documents the CRA seeks. It's your money, your life. If you want to stay on the right side of the tax man, keeping records for tax purposes is not optional. But there is a second, just as important reason. Good financial records help you make better financial decisions for your family. You're the CEO of your money; make sure you have the documents you need to verify your personal net worth. It makes sense not just from a tax perspective but from a wealth-management and estate-planning point of view, too. Your professional tax and financial advisors can help. Evelyn Jacks is President of Knowledge Bureau and author of Essential Tax Facts 2012 and Financial Recovery in a Fragile World with Al Emid and Robert Ironside.

If you have lent money to ó or borrowed money from ó your spouse you will want to take note of this Jan. 30 deadline. You have less than a week to collect, or pay, the prescribed rate of interest on your loan, if you want to stay in Canada Revenue Agency's good books. Inter-spousal loans allow couples to split capital gains and income earned on "property.î The idea is the higher-income spouse lends money to the lower-income spouse, allowing the latter to purchase either real or financial assets. Then, the money earned on the property and the gains on the property's disposal is taxed in the hands of the lower-income spouse, who presumably has a lower income tax rate. Income splitting is a legitimate strategy and to keep it that way the CRA requires a repayment schedule be put in place at the time of the loan, with an annual interest rate that is no less than the prescribed rate of interest (currently 1%). If the spouse who is doing the borrowing does not stick to the repayment schedule, the CRA does not recognize it as a loan and attributes the earned income back to the lending spouse. So, to be exempt from attribution rules, it is necessary to maintain the structure of the loan. The borrowing spouse, therefore, must pay the lending spouse the prescribed interest within 30 days of the end of each calendar year, that is, no later than Jan. 30. The lending spouse is required to report the interest received on his or her income tax return as income. Assuming the loan was used to purchase income-producing stocks in a non-registered account, the borrowing spouse can deduct the interest paid on his or her tax return.   Suzanne Wray is Business Relations Coordinator at the Knowledge Bureau.   Additional Educational Resources: Essential Tax Facts 2012 and Introduction to Personal Tax Preparation Services.  

Having escaped -40∞-Celsius temperatures in Calgary yesterday on the Knowledge Bureau's nationwide T1 Tax Update Workshop Tour, today's beautiful sunrise over Vancouver reminds me why this lovely province is a retirement haven. Yet, for many, retirement has become more costly and saving for retirement has become more difficult. That makes the pension reforms being introduced in Canada in 2012 doubly significant. In addition to the multitude of changes to the Canada Pension Plan introduced this month (see "Masteryî below), Canadians can look forward to the passage of federal and provincial legislation that will bring life to a new pension savings opportunity ó the Pooled Retirement Pension Plan (PRPP). The PRPP will fill a gap for the self-employed as well as employees whose employers do not provide an employer-sponsored pension. And the latter is a growing number of people. From 1991 to 2007, the proportion of working Canadians who have access to employer-sponsored plans has declined to 34% from 41%, leaving a gap in discretionary retirement savings opportunities for two-thirds of Canadians. The PRPP will help to close that gap. The PRPP also provides an attractive option for small-business owners who found participation in existing Registered Pension Plans ó defined benefit or defined contribution ó too expensive. They and their employees will have access to a large-scale, professionally administrated and lower-cost pension plan, which gives them an opportunity to split retirement income with the spouse sooner than under current RRSP rules. According to background information provided by the federal Department of Finance, Canada's retirement pension system is already a world model recognized by the Organization for Economic Co-operation and Development for its success in reducing poverty and providing high levels of income replacement for retirees. These new pension reforms should help make retirement even better for disciplined savers in the "gapî categories. It's your money, your life. This tax season, be sure to ask your tax and financial advisors about these retirement savings and income-replacement changes and what they mean to you and your family in 2012 and beyond. Evelyn Jacks is President of Knowledge Bureau, which offers a certificate self study course on Tax Efficient Retirement Income Planning. She is also the author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World.

Surprising no one, the Bank of Canada yesterday kept its benchmark overnight rate at 1%. Citing the sorry state of the global economy ó a deeper and longer recession in Europe than anticipated, a slowing U.S. recovery and decelerating growth in China ó the central bank decided to maintain its target at 1%, where it has been since Fall 2010. "With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada,î the Bank said in its release. "The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2% inflation target over the medium term.î The setting of the overnight rate is closely watched for what it portents about today's release of the Bank's Monetary Policy Report. And many economists took note of the Bank's estimates concerning economic growth ó a better-than-expected 2.4% in 2011 to be followed by 2% in 2012 and 2.8% in 2013. "The economy is only anticipated to return to full capacity by the third quarter of 2013, one quarter earlier than was expected in October,î the Bank says. That seems to relieve some economists. As TD Bank Group economist Leslie Preston says in a report: "Our own outlook for the Canadian economy is somewhat more pessimistic over the next two years, and we view today's announcement as consistent with our call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013Ö The theme that interest rates will need to remain lower for longer remains intact.î The one worrisome note is that low interests rates will "buttressî consumer spending and housing activity. "Household expenditures are expected to remain high relative to GDP,î the Bank said in its releases, "and the ratio of household debt to income is projected to rise further.î That seems to be a condition that the Bank and economists are willing to accept in the current global economy.

This past week saw three banks ó Bank of Montreal, TD Canada Trust and Royal Bank of Canada ó lower their closed mortgage rates to 2.99%, the lowest level in Canadian history. Generally speaking, these limited-time-only offers were aimed at first-time homebuyers. Yet, given fears of an overheated housing market and warnings about household debt, the move does seem a bit out of step with the times.But is Canada's housing market really overheated? Or is it, as the bank economists have suggested this week, already softening? Certainly, housing prices in Canada have climbed steadily in recent years. One indicator, Statistics Canada's new housing price index, has shown a year-over-year increase of 2.5% in November led by Toronto and Oshawa (treated as one entity by StatsCan) with a 6.2% gain. But Winnipeg, at 5.8%, wasn't far behind, nor was Regina, at 5.3%. Calgary, Vancouver and Victoria were the only cities to see even slight decreases year over year. The Bank of Canada, in its Financial System Review (December 2011), used another indicator: the ratio of house price index to household disposable income. For more than two decades beginning in 1990, the ratio hovered around three. By 2010, the house price index was five times household disposable income, a worrisome jump. The International Monetary Fund, in its November 2011 report on Canada, looked at two other housing price indicators, which it feels are historically high. The price-to-rent and price-to-income ratios are 29% and 20%, respectively, above their averages for the last decade. "Their elevated level and other empirical evidence suggest that house prices may be higher than justified by underlying fundamentals, at least in some provinces,î says the report. "Staff estimates indicate an average price overvaluation of around 10%, with significant regional differences.î But the indicator to which bank economists look is the national residential average price published by the Canadian Real Estate Association. In December, the year-over-year price increase was a mere 0.9%, the slowest pace of growth since October 2010. Sales, too, slowed, up 4.6% from year‐ago levels. "For all of 2011,î points out Doug Porter, BMO's deputy chief economist, "sales rose a mild 2.2%, hardly worthy of the hectolitres of ink spilled over the subject in recent weeks.î The economists expect prices to continue to shrink as 2012 advances. Adds Benjamin Tal in his CIBC report: "It is highly probable that the first quarter of 2012 will see the first year-over-year decline in prices since the recession.î What worries the Bank of Canada and the IMF is not a U.S. style crash but the impact on the recovering economy if housing prices drop 10%-15%. In a "negative feedback loop,î declining house prices would reduce household net worth, causing consumers to check spending further. It would also affect employment in the construction sector which would soon take its toll on employment in other sectors. "An external shock triggering a decline in house prices by 15% accompanied by a severe downturn of construction activity,î says the IMF report, "could result in a GDP decline of some 2.5% over a period of two years relative to the baseline.î Then, there is the question of affordability if interest rates return to historic norms. "Further out,î says Tal, "the most likely scenario is that the eventual increase in interest rates will lead to a decline in prices (probably in the magnitude of 10%-15%).î But overall, bank economists seems to feel the softening house prices are just what is needed to ensure a "soft-landing scenario.î As Porter concludes: "We look for both sales and prices to be roughly flat this year. That could be just what the policy doctor ordered, allowing incomes to catch up to higher prices.î TD Bank Group economist Francis Fong strikes the most cautionary note: "2012 is likely going to be a bumpy rideÖ The first half of this year will likely see housing activity pullback further from its current level alongside both global and domestic economic conditions, while the second half of the year is likely to see some improvement as those same factors improve.î   Additional Educational Resources: Financial Recovery in a Fragile World and Debt and Cash Flow Management