Money123: Preparing for (gulp) another Bank of Canada rate decision

Canadians are stressed about another rate hike

The Bank of Canada’s next interest rate decision is set for Wednesday, and the fear that the central bank could continue to raise the cost of borrowing has a growing number of Canadians worried for their pocketbooks.

The latest instalment of the MNP Consumer Debt Index released this week shows a mixed picture of worry about handling future rate hikes and some improvements in the ability to cope with higher interest costs.

Some 37 per cent of respondents to the Ipsos polling said they couldn’t absorb another $130 in interest payments on their debt, compared with 32 per cent in the previous survey.

More than half of those surveyed said they’re $200 or less away from not being able to meet all of their financial obligations, according to MNP.

But despite the worsening outlook for many Canadians, most indicated their ability to pay down debt had improved in the past quarter despite the Bank of Canada’s rapid tightening cycle.

Read more here to find out why.

Where Canadians are finding relief

Statistics Canada provided the Bank of Canada with a fresh look at inflation figures for September heading into next week’s rate decision.

On Tuesday, the agency revealed that inflation cooled overall to 3.8 per cent annually last month, down from 4.0 per cent in August.

StatCan signalled out some long-awaited signs of relief at the grocery store in the report.

Price growth for meat, dairy products, vegetables and coffee and tea all decelerated month-to-month, though edible fats and oils, bakery products, fish and fresh fruit saw costs rise more quickly.

The cooling in inflation, mixed with the release of business and consumer surveys from the Bank of Canada itself this week, will have major implications for the Oct. 25 rate decision.

Read on to find out what economists and markets are saying about the odds of another hike.

‘Tis the season to be frugal

The past months of high inflation and rising interest rates, combined with a gloomy economic outlook, have some Canadians scaling back their holiday shopping plans this year.

The annual report from Deloitte Canada showed the amount Canadians are planning to spend over the holidays this year has reached a five-year low of $1,347.

That’s down 11 per cent from 2022’s spending forecast and well short of the roughly $1,700 average spend seen back in 2019 when the survey launched, says Deloitte Canada partner Marty Weintraub.

“This year we’re just basically going to see a hunkering down. So we’re going to spend less on gifts and also give fewer gifts to fewer people,” he told Global News.

Consumers are also feeling “gouged” by retailers after dealing with decades-high inflation, Weintraub noted, meaning businesses might have to work harder to earn back consumers’ trust ahead of the holidays.

But Canadians aren’t scaling back on every part of the budget, Deloitte found.

Read on to find out where consumers are prioritizing their scarce spending.

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– THE QUESTION –

“My company recently went through a set of downsizing and I have been laid off but retained during a transition period (until the end of the year). As part of this process, I will be receiving a sizeable retention bonus happening before the end of the year.

My question is: given that the retention bonus is significant and I am not sure how long it will take me to find a job in the new year, is there anything I can do to reduce the tax burden on this one-time bonus?

I am the sole income earner in my family and own my own house. I have already maxed out my RRSP contributions for the year but have some room left in my TFSA.”

— A Money123 reader 

“Receiving a significant retention bonus or severance pay can be a once-in-a-lifetime opportunity. It’s smart to invest most or all your extra money — not spend it all.

The most difficult part is that there are usually unknowns that make it hard to know for sure what is best for you. The biggest unknowns are how long it will take you to find a new job, whether your new job will be a higher or lower income, and whether your retention bonus will be extended.

Retention bonuses are usually a higher income than you would otherwise earn. Otherwise, you would leave as soon as you find a new job.

The three main ways to save tax are the three Ds: defer, deduct, divide.

In your case, you might be able to defer some tax by asking your employer to pay all or part of your retention bonus as a lump sum in January 2024. This would defer tax on that amount to next year, which helps you if you will be in a lower tax bracket next year. If your income for 2024 is lower than for 2023, this income deferred to next year could be taxed less. This could happen if you take a while to get a new job or your new job is a lower income than your retention bonus.

Also, 2023 might turn out to be your highest income year, so looking for other deductions can help you. You have done the most obvious deductions that could help you, since you have already maximized your RRSP contributions. You own a home, so you cannot contribute to an FHSA. You do not have to deduct all the RRSP contributions you made for 2023. If it turns out that you may be in a higher tax bracket in 2024, you can defer deducting your 2023 RRSP contributions until 2024 to get a larger tax refund next year.

If you have more money, the best place to invest it is your TFSA to avoid tax on the future growth.

After your TFSA is maximized, you can invest it in a non-registered account, which can be joint with your spouse, if you have one. In this case you can probably have investment income from these investments taxed to your spouse. Since your spouse is not working, you should pay little or no tax on the future investment income by having this income taxed to your lower income spouse.”

–  Ed Rempel, fee-for service financial planner & tax accountant, Unconventional Wisdom

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