Money123: How rate cuts affect the housing market and your savings

Homebuyers still sidelined after rate cut

Early reaction to the Bank of Canada’s first interest rate cut in more than four years shows Canadians might need a little bit more before they’re willing to wade into the housing market.

Ipsos polling conducted exclusively for Global News following the central bank’s 25-basis-point rate drop last week shows a majority of Canadians still believe housing is unaffordable, and more than six in 10 would-be homebuyers are staying on the sidelines of the market until they see more cuts.

“What Canadians are saying to us here is 25 basis points is just a drop in the ocean,” says Sean Simpson, senior vice-president at Ipsos Global Affairs.

Among those who don’t own a home, some six per cent said interest rates would have to drop by less than one percentage point for them to consider buying a property. One in four said they’d need to see cuts of between one and 3.99 percentage points to get into the market, while 10 per cent said they needed steeper drops to make home ownership a possibility.

Despite the inertia among prospective buyers, the polling also revealed a sense of growing optimism among some Canadians about their housing plans.

Read more on what the hopeful start of the easing cycle means to Canadians.

What about savings rates?

While a drop in the Bank of Canada’s policy rate is good news for borrowing costs, experts say there’s an impact customers should be aware of on their savings accounts.

Shannon Terrell, lead writer and spokesperson at NerdWallet Canada, says that while there’s “a fairly linear relationship” between moves in the Bank of Canada policy rate and rates offered on loans, it’s more of a “mixed bag” on savings products.

After last week’s rate cut, Terrell says some rates on savings accounts and guaranteed investment certificates at a few major banks saw declines.

But it’s still a competitive landscape out there with plenty of options, particularly for Canadians willing to look beyond Canada’s Big Six banks, she argues.

There are a few catches to be aware of, though, particularly on promotional accounts that come with time-limited rates or other expectations to earn the return.

Read more on the state of the savings landscape in Canada after the central bank rate cut.

Preparing for capital gains changes

This week saw the Liberal government introduce long-awaited measures affecting how capital gains taxes are applied in Canada.

But the changes are not expected to affect all Canadians equally — those with significant investment income or secondary properties might feel more of an impact than others, experts warn.

Currently, all capital gains come with an inclusion rate of 50 per cent, meaning half of the profits realized from the sale are added to taxable income in that year.

But starting June 25, that inclusion rate would rise to 67 per cent on any gains realized above $250,000 annually for individuals. That two-thirds inclusion rate would apply to all such gains made by corporations and many trusts.

Read more on what to know before the changes in capital gains taxes go into effect.

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– THE QUESTION –

“What are the advantages/disadvantages of ‘gifting’ over 2 investment properties and 1 plot of land prior to inheritance? Are there any benefits of moving those properties to a business corporation or holding company?”

— A Money123 reader 

“One of the obvious advantages of gifting any asset during your life, whether real estate or otherwise, is to see your family benefit from an advance on an inheritance. A financial advantage is that you may reduce the income tax otherwise payable upon your death, or at least keep that tax from growing. You may also reduce estate administration tax or probate fees that would be payable to settle your estate, but this ranges from just hundreds of dollars in some provinces to 1.695%. However, you would also accelerate deferred income tax by making a gift during your life.

If you transfer a capital asset like an investment property or land that has appreciated in value, that transfer takes place at the fair market value. It is a common misconception that you can gift or sell an asset to your child for a dollar and avoid tax. When you transfer an asset to a child, it is as if you sold it to them whether money changes hands or not, with the resulting capital gain taxable in the year of the gift.

The new capital gains inclusion rate of two-thirds on capital gains exceeding $250,000 is a consideration for a gift of real estate that has appreciated significantly. The higher inclusion rate and higher tax payable applies to every dollar of capital gains for a corporation under the new rules, so there is no exemption. As a result, transferring real estate into a corporation now has significant disadvantages. The tax rate for rental income in a corporation is also quite high — similar to the top tax rate for a high-income personal taxpayer. So, while there may be some reasons and some instances where holding real estate in a corporation makes sense, there may be more disadvantages than advantages to transfer an existing property into a corporation. Someone considering it should seek professional advice.”

–  Jason Heath, managing director, Objective Financial Partners

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