Money123: Rate cut ‘possibilities’ are (finally) here

Bank of Canada holds – for now

The Bank of Canada delivered a sixth straight hold at its interest rate decision this week, but the head of the central bank gave his first hints that rate cuts this summer are possible.

The Bank of Canada’s policy rate remains at 5.0 per cent amid recent declines in inflation and easing in the labour market. The central bank’s key indicators are all moving in the right direction, governor Tiff Macklem told reporters Wednesday.

He was also asked whether a cut to the policy rate was on the table for June, the central bank’s next decision date.

“Yes, it’s within the realm of possibilities,” he said, marking a departure from previous announcements when he insisted it was “too early” to talk about rate cuts.

But like all central bank rate speculation, the path to interest rate relief comes with uncertainty and risks to the timeline.

Read more on what market watchers are saying about the likely timing for rate cuts after this week’s announcement.

New policies to help first-time homebuyers

Prospective homebuyers might not have seen any changes from the Bank of Canada this week, but the Liberal government did propose new policies that could help some Canadians get their first rung on the property ladder.

Teeing up items for inclusion in the 2024 federal budget this week, Finance Minister Chrystia Freeland announced on Thursday that the Liberals would allow first-time homebuyers to take out an insured mortgage with an amortization of 30 years, up from the traditional 25, on newly built homes starting later this summer.

The move would reduce the burden of monthly mortgage payments by spreading out the length at which the loan is repaid.

Elsewhere, the Liberals plan to increase the limit buyers can draw down from their RRSPs to $60,000, up from the current cap of $35,000, and are extending the grace period before individuals have to pay the money back into their accounts.

The changes come as a CIBC poll released this week showed buying a home feels out of reach for 76 per cent of non-owners.

Read more on what the housing policy changes might mean for first-time buyers and the wider market.

Bare trust backstep angers Canadians

The Canada Revenue Agency’s 11th-hour decision to remove a new requirement for Canadians to file bare trust declarations in their 2023 tax returns has angered some filers who say they’re out a chunk of change.

Peter Corry from Alberta says he recently paid $700 for an accountant to file his bare trust tax returns, out of fear of a penalty for missing the April 2 deadline.

However, following the CRA announcement last week that it is retracting the reporting requirement, Corry says he feels the money was spent for nothing.

“For being a responsible citizen and filing we lose money by the CRA changing the rules 4 days before the deadline! How do I get that money back?” Corry said in an email to Global News.

The CRA said the decision was made “in recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians.”

Read more on what the last-minute changes meant for tax filers and their accountants, and any recourse that might be available.

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– THE QUESTION –

“I’m 65 and retired. I currently own my own condo valued at $500K, which is encumbered with a small mortgage of $75K. I have no beneficiaries to leave my estate to. I’m pondering selling my condo and combining the proceeds with existing investments of $350K and just renting. I also collect CPP, OAS and a small annuity. Wondering if it is wise to divest from real estate.”

— A Money123 reader 

“If this is a pure investment diversification question, I understand your concern that over 50 per cent of your wealth is tied up in one sector. That said, the growth on this ‘investment’ is tax-free and it really doesn’t matter what the local real estate market does since you are not focused on growing your net worth.

If you invest the proceeds of sale, you will expose the (net) $400K to the vagaries of the investment marketplace, and you are likely to incur tax on the income. Alternatively, you could use the funds to buy an additional annuity, thus transferring the investment risk to the annuity provider. There could be some tax advantages to this option.

There are other aspects that should be considered, and I tend to start by looking at cash flow as the driver in these decisions. It appears you are, at worst, in a cash flow-neutral situation, since you are still carrying a mortgage on the property and using investment income to help service the debt. Not ideal, in my mind, but that’s a conversation for another day!

I’m guessing your monthly expenses to maintain the condo are strata fees and property taxes – maybe $1,000? What will it cost to rent in your market – $2,000?

I’m sure you could generate enough income from investing the $400K (assuming after fees and moving costs) to cover that differential. But, how robust is the rental market? Would you be moving every couple of years as landlords change over time?

Bottom line, though, is the question of whether you are happy in your condo. Is there any threat of a special assessment for capital repairs looming? Does it suit your present and future lifestyle? Can you find something to rent nearby with the same amenities at a reasonable price? Have you considered an ‘all-inclusive’ retirement home as an option if you sell up?

If staying in the condo makes your heart soar, you could eliminate the burden of debt servicing and create some more tax-free cash flow by using a reverse mortgage – again, a conversation for another day.”

–  Lenore Davis, CFP, R.F.P.

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