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The Federal Government’s recent budget has made waves with its spending, the size of its deficits over the coming years, and its tax changes. Increases to the Capital Gains Tax (CGT) were particularly contentious:

Any capital gain realized on or after June 25^th, 2024, that exceeds $250,000 will see 66% of the gain taxed, up from the present 50%.

This increased ‘inclusion rate’ of 66% applies for individuals, trusts, and corporations.

Keep in mind that the $250,000 threshold only applies to individuals, not corporations or trusts! See pg. 336 of the Budget for this important point.

The capital gains tax exemption on the sale of a primary home remains unchanged.

But for investment properties, pre-construction real estate, cottages, and commercial real estate, the CGT on a sale will be going up.

The government argues that 99.8% of Canadians will not be affected by these changes, and that only 40,000 taxpayers generally achieve capital gains of over $250,000 in “any given year.”

So, what are some scenarios for Tembo customers and readers to consider? What if you’re inheriting a property from your parents?

Inheritance:

If your parents only own one home that they will leave to you, it will be exempt from the CGT. On inheritance, a property is likely ‘sold’ to you as the beneficiary, so there will be no CGT, but other tax consequences are a possibility. An investment property or vacation home that you inherit will be subject to CGT on the transfer if it has accrued value.

Value increases on inherited properties:

When you inherit a primary residence, the fair market value of the home on receipt is the baseline you’ll be assessed on. If the value of the home is $500,000 on receipt, then the capital gain will be $100,000 if you sell it three years later for $600,000.

Exemptions?

The 2024 budget will raise the lifetime capital gains exemption on the sale of farming and fishing properties to $1.25 million. That figure would be indexed to inflation thereafter.

So why sell now?

A key question that many have been raising on X and across media channels. Why should anyone with an investment property or cottage sell after June 25^th? Rates are high and price dynamism is weak right now. There’s not much time to prepare for a sale up to June 25^th. Why not wait until the next federal election, when a potential Conservative Government will likely reverse these changes? A real estate market already beleaguered by higher rates will likely be cooled even more by this measure.

Any options?

The key stipulation is that the primary, principal residence is exempt from the CGT. So how does a property qualify as a principal residence? A key factor is that you have to live in the property for at least one year. Here are some of the conditions according to the CRA:

1. It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
2. You own the property alone or jointly with another person.
3. You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
4. You designate the property as your principal residence.

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to half of a hectare (1.24 acres).

Tembo strongly advises that our clients, community, and readers consult with us and a tax professional to navigate these changes. We can help you explore options, plan, and come up with the best possible financial solutions. Whether you need a first, second, or third mortgage, debt consolidation services, or other financial help, please call us at 1-844-238-6717!

Deloitte Canada’s recent economic outlook report sheds light on the Canadian economic landscape, painting a nuanced picture of both the challenges we face and potential for new economic growth. Despite persistent headwinds such as sticky inflation, escalating business closures, and a concerning uptick in mortgage defaults, Deloitte’s analysis suggests that Canada may manage to sidestep a recessionary spiral. This cautious optimism is rooted in several factors, including anticipated interest rate adjustments (rate cuts – a big if), and a hopeful trajectory for economic recovery, possibly materializing in the latter half of 2024.

A pivotal aspect influencing Canada’s economic trajectory has been the proactive measures undertaken by the Bank of Canada to address soaring inflation rates. Beginning in March 2022, the Bank initiated a series of interest rate hikes, significantly raising the country’s key interest rate from near-zero levels to the current five percent. However, the language has shifted away from the fight against inflation to potential interest rate cuts, possibly as early as June or July. This anticipated monetary policy shift is poised to recalibrate the economic landscape, potentially bolstering consumer confidence and stimulating investment activities and a new real estate boom.

Despite these glimmers of optimism, Deloitte’s report maintains a pragmatic outlook for Canada’s economic performance in the near term, suggesting a continued state of economic inertia, particularly during the initial half of 2024. Projections indicate a modest real GDP growth of approximately one percent for the year, with a more substantial rebound expected in 2025, reaching an estimated 2.9 percent growth rate. These forecasts are contingent upon various underlying assumptions, including robust GDP expansion in the United States, sustained alleviation of inflationary pressures, forthcoming interest rate adjustments, and a steady influx of newcomers contributing to demand dynamics within Canada’s economy.

Recent data from Statistics Canada underscores the complexities of Canada’s economic landscape, with January witnessing a modest uptick of 0.6 percent in GDP followed by a preliminary estimate of 0.4 percent growth in February. However, the report underscores that the trajectory of the economic recovery remains intricately intertwined with the future trajectory of interest rate adjustments, underscoring the critical importance of continued moderation of inflationary pressures.

The persistent challenges posed by elevated housing costs emerge as a significant impediment to achieving sustained economic stability, with Canadians grappling with renewed mortgages at higher rates, consequently exacerbating the burden of shelter expenses for both homeowners and renters alike. Wage pressures continue to persistently outpace inflation rates, coupled with a lack of productivity increases, continue to drive up unit labor costs for businesses, further contributing to inflationary pressures.

Despite the overarching economic uncertainties, Deloitte’s report offers a glimmer of hope by spotlighting the resilience exhibited by Canada’s labor market, albeit with a tempered outlook for employment gains in 2024. Concurrently, household spending is expected to remain subdued during the initial months of the year, as consumers navigate the challenges posed by the escalating cost of living.

Looking forward, Deloitte’s analysis anticipates a more favorable economic landscape in the subsequent year, underpinned by lower interest rates, a reinvigorated economy, and the unleashing of pent-up consumer demand. However, lingering concerns persist regarding the trajectory of business investments, with Deloitte highlighting a worrisome deceleration in investment activities, exacerbated by elevated interest rates dampening investor confidence and limiting expansion prospects. In contrast to the Canadian scenario, the U.S. economy has demonstrated remarkable resilience amidst the backdrop of interest rate hikes, albeit with a potential moderation in growth anticipated in the coming months. Deloitte projects a positive yet tempered outlook for the U.S. economy, with real growth rates projected at 2.4 percent in 2024 and 1.4 percent in 2025, underscoring the intricate interplay between monetary policy decisions and broader economic dynamics.

Tembo always keeps an eye on how policymakers are responding to housing issues. Politics may not always be the most popular topic, but politicians make the world. Given economic instability and interest rates back at long-term historical averages, policy changes and government initiatives are paramount for both prospective homebuyers and mortgage lenders. The recent unveiling of the federal budget brings perhaps the biggest set of housing changes in living memory. This budget has the potential to reshape the housing sector in the Greater Toronto Area (GTA), and beyond. From increased housing supply to innovative financing options, let’s delve into how these measures will impact Toronto’s private mortgage lending sector and empower aspiring homeowners.

Expanding Housing Supply:

With the ambitious commitment to construct 3.87 million new homes by 2031, the federal government’s budget sets a robust foundation for addressing Toronto’s housing shortage. For private mortgage lenders in Toronto, this influx of housing projects presents a myriad of opportunities to support homebuyers in securing their dream properties.

Empowering First-Time Buyers:

The extension of 30-year mortgage amortizations exclusively for first-time buyers of new builds is a game-changer in Toronto’s competitive real estate market. This initiative not only enhances affordability but also incentivizes prospective homeowners to explore newly developed properties, thereby boosting the construction sector and stimulating economic growth.

Enhanced Financial Flexibility:

The budget’s revisions to the Home Buyer’s Plan, including raising the withdrawal limit to $60,000 and extending the RRSP repayment term, offer much-needed financial flexibility for Toronto’s aspiring homeowners. These changes give our clients more flexibility and options in tailoring financing solutions that cater to the diverse needs of their clientele, facilitating smoother transactions and fostering long-term relationships.

Unlocking Land Resources:

Through the review of federal lands portfolios and the establishment of the Public Lands Acquisition Fund, the budget endeavors to identify and acquire additional land for housing development. For private mortgage lenders in Toronto, this initiative signals a promising influx of properties into the market, paving the way for expanded lending portfolios and increased revenue streams. The budget proudly showed maps of huge numbers of housing projects across the country being built on public lands.

Investing in Infrastructure:

The infusion of funds into the Apartment Construction Loan Program and the Housing Accelerator Fund underscores the government’s commitment to accelerating housing construction and bolstering infrastructure development. Recall that the recent Ontario provincial budget allocated billions in infrastructure spending to help developers churn out more houses. All levels of government are facilitating new developments and reducing the costs developers have to pay to build infrastructure and new housing.

Promoting Innovation:

The allocation of resources to initiatives such as the Homebuilding Technology and Innovation Fund and support for local innovative housing solutions underscores the government’s dedication to fostering a culture of innovation in Toronto’s housing sector.

Facilitating Secondary Suite Development:

The introduction of the Canada Secondary Suite Loan Program presents a unique opportunity for Toronto homeowners to unlock the potential of their properties and increase rental income. Although the Ontario government has come out against blanket regulations to facilitate fourplexes without permits, they’ve delegated this authority out to municipalities.

Driving Sustainability:

The Canada Greener Homes Affordability Program aims to promote energy efficiency retrofits for Canadian households, aligning with Toronto’s commitment to sustainability and environmental stewardship. Private mortgage lenders can support homeowners in accessing financing for eco-friendly upgrades, contributing to a greener, more resilient cityscape.

Tax hikes could cool investment in housing:

To pay for all of its spending, the budget includes significant adjustments to capital gains tax, and updates to tobacco and vaping regulations.

Capital Gains Tax Revision:

One of the noteworthy changes outlined in the budget is the adjustment to the inclusion rate on capital gains. Effective June 25, 2024, the government plans to increase the inclusion rate on annual capital gains exceeding $250,000 for individuals and all capital gains for corporations and trusts from one-half to two-thirds. This means that only one-third of any capital gain greater than $250,000 will be tax exempt. It’s important to note that the principal residence exemption remains unaffected by this change, providing relief to homeowners.

In recent days, stocks and the financial world have been abuzz with discussions surrounding recent announcements made by the Federal Reserve, particularly regarding inflation, interest rates, and economic growth projections. As a private mortgage lender serving the GTA and southern Ontario, we’re excited to break down these developments and their potential implications for our clients and the broader real estate landscape. So, let’s delve into the details and unravel what the Fed’s statements mean for Toronto homeowners and potential buyers.

Federal Reserve Chair Jay Powell’s March 21^st remarks focused on the persistence of high inflation. Despite inflation remain elevated and rising gradually in the U.S., Powell emphasized that they haven’t fundamentally altered the narrative of gradual price pressure alleviation. This assertion is pivotal, indicating the Fed’s steadfast commitment to economic stability amidst inflationary pressures. For Toronto residents, this stance suggests that it will be difficult for the Bank of Canada to ease rates given the Fed will hold them at present. The Fed continues to take a cautious but proactive approach to managing monetary policies, which could influence mortgage rates and borrowing costs in the foreseeable future.

The Federal Reserve’s decision to maintain current interest rates despite U.S. inflation having increased for five consecutive months underscores its strategic stance amid evolving economic conditions. Despite initial expectations of three interest rate cuts this year, the Fed opted to uphold existing rates, signaling confidence in the economy’s resilience. This had stocks, gold, and cryptos soaring. Powell’s remarks emphasized the importance of continued caution regarding inflation and economic performance.

With ongoing discussions about inflation and interest rates, the Federal Reserve also provided updated economic growth projections. Forecasts indicate a robust outlook, with the economy poised to expand by 2.1% this year, more than previous estimates. Moreover, the unemployment rate is anticipated to remain low, hovering around 4% by the end of 2024. Tembo notes the strength of the U.S. labour market as indicative of the unlikelihood of the economy going into a recession – for now. You do not have a recession with a 4% unemployment rate. If a recession was coming, jobless numbers would be rising, this is not the case in the U.S. These positive indicators bode well for Toronto real estate, as a U.S. recession would pull Canada into one as well. This economic stability underpins continued demand for housing and strong investor confidence in the market’s resilience.

The Federal Reserve’s announcements underscore the interconnectedness of global economic factors and their impact on local real estate markets. While inflationary concerns persist, the Fed’s cautious approach to interest rate adjustments provides a measure of stability for borrowers and investors alike. However, it’s essential to remain vigilant and adaptable in navigating potential shifts in market conditions.

For prospective homebuyers and existing homeowners in Toronto, understanding the implications of the Federal Reserve’s actions is paramount. When the Fed cuts rates, the BOC usually follows. The vice versa is also true. While the current interest rate environment seems poised for cuts eventually, fluctuations in inflation and economic growth could influence mortgage rates in the medium to long term. As such, individuals seeking to purchase or refinance properties should consider consulting with Tembo Financial’s team to assess their options and develop strategies tailored to their financial objectives. Timing is critical, and real estate conditions vary across Ontario.

In light of the Federal Reserve’s announcements, prudent financial planning is essential for homeowners and investors in Toronto’s real estate market. Whether you’re contemplating a new mortgage, looking to consolidate credit, or exploring investment opportunities, it’s crucial to leverage expert guidance and market insights to make informed decisions.

The recent pronouncements from the Federal Reserve have sparked discussions and debates across the financial spectrum, with implications reaching far and wide, including Toronto’s booming real estate market. By keeping rates steady and signaling more openness to rate cuts in the coming months, the Fed has helped take equities to all time highs. As a leading mortgage lender in the region, we’re committed to providing our clients with the knowledge and resources they need to navigate these changes effectively. By staying informed, leveraging expert guidance, and adopting a strategic approach to financial planning, homeowners and investors can capitalize on opportunities and thrive in Toronto’s vibrant real estate ecosystem.

The end of 2023 saw the Bank of Canada maintaining its benchmark interest rate in the last three decisions, prompting a significant shift in market discussions from potential rate hikes to the anticipation of rate cuts. Tembo is noting that this broad discourse is present not only in Canada, but across the media spectrum in the U.S. Analysts have been closely monitoring language from the Fed in anticipation that U.S. rates will fall. This is especially timely given the interest costs on U.S. Federal Debt now exceed $1 trillion a year – a huge squeeze on U.S. finances.

Even Tiff Macklem, the Bank of Canada’s top policymaker, has recently hinted at the possibility of rate cuts this year. Despite ongoing warnings about potential rate hikes if inflation control progress falters, there seems to be a growing acknowledgment that adjustments may be needed.

The Bank of Canada’s swift increase in the policy rate, currently standing at 5.0%, up by 4.75 percentage points since March 2022, has created substantial pressure on Canadian households, businesses, and governments. This surge aims to curb inflation, leading many Canadians, especially homeowners facing mortgage renewals, to keenly monitor signs of the tightening cycle possibly coming to an end.

Economists in discussions with Global News are forecasting a policy rate decline for 2024. However, similar to Macklem and his colleagues, they approach these predictions with caution. Experts suggest that the journey back to the central bank’s two percent inflation target might encounter obstacles, potentially delaying the timeline for interest rate cuts in the coming year.

Macklem, in a year-end speech at the Canadian Club in Toronto, commended the significant progress made in cooling inflation. He expressed satisfaction with the outcome of the second year of monetary policy tightening, asserting that the economy is no longer overheated, alleviating inflationary pressures.

As of November, the annual inflation rate is at 3.1%, a notable decrease from the 41-year high observed in June 2022. Expectations of inflation dropping below three percent in November were surpassed, with persistent price pressures noted in groceries, shelter, and some services.

After Macklem’s speech, he stated in an interview with BNN Bloomberg that the Bank of Canada anticipates interest rates coming down at some point in 2024. Emphasizing the necessity for sustained progress in core inflation metrics before committing to rate cuts, Macklem’s counterpart in the U.S., Jerome Powell, was more straightforward, announcing the expectation of three rate cuts in 2024.

Following the November inflation data, many economists on Bay Street reiterated their predictions for rate cuts. While some forecast cuts by June, money markets indicate cuts as early as April. However, Derek Holt, Vice-President and Head of Capital Markets Economics at Scotiabank, remains unconvinced, citing potential risks that point more towards another hike than a shift to cuts.

Housing market concerns and geopolitical tensions are shared by Holt and the Bank of Canada. The governing council’s meeting minutes on Dec. 6 expressed worries about easing monetary policy prematurely, potentially triggering a rebound in housing activity. Despite the concerns, some borrowing costs have already started decreasing, with five-year fixed rates on insured mortgages falling below five percent in December.

Holt argues for the Bank of Canada to maintain its tightening bias, expressing concern that signaling an end to hikes could fuel expectations of rate cuts. Relief on mortgage rates, coupled with constrained housing supply and increased demand after a year of robust job gains and population growth, may result in a heated spring market.

Apart from real estate, potential disruptions in the inflation outlook include geopolitical tensions in the Middle East. Concerns about supply chains and global inflation due to such escalations are reminiscent of the impact of the Russian war in Ukraine.

Looking at the global stage, Holt’s attention is on the 2024 U.S. election. He suggests that a second Donald Trump presidency could present challenges, with potential geopolitical risks to trade and supply chains. If these risks materialize, the Bank of Canada might face weaker growth and persistent inflationary pressure.

Wage growth remains a point of concern for Holt, with growth in the range of four to five percent considered excessively high in relation to inflation. The Bank of Canada has flagged these pay gains and productivity declines as inconsistent with the goal of bringing inflation back to target.

The Canadian labour market added jobs in 2023, despite a rise in the unemployment rate due to a growing workforce. Signs of cooling in the data are noted, and the trajectory of Canada’s overall economy holds sway over the central bank’s rate path.

Forecasts by Holt and Pedro Antunes, Chief Economist at the Conference Board of Canada, predict the Canadian economy avoiding an outright recession. Some forecasters anticipate a short, shallow recession for late 2023 or early 2024, but not with severe job losses. Antunes notes that if growth takes a more significant hit in the new year, the Bank of Canada may need to act swiftly.

Macklem’s year-end speech suggests that 2024 will be a “year of transition,” with difficult quarters ahead as growth slows, and consumers rein in spending. Despite the challenges, Macklem remains optimistic that the conditions for achieving the two percent inflation goal are increasingly falling into place.

Macklem predicts that by the year-end speech in 2024, the economy will be growing again, and inflation will trend back towards two percent. The Bank of Canada’s latest forecasts target annual inflation hitting that target sometime in mid-2025. However, Macklem acknowledges the difficulty of predicting the future and emphasizes the need for vigilance. Even modest rate cuts could have the capacity to supercharge the market and kickoff another bull run on prices. Let’s wait and see what happens, and if inflation will stay low.

The Canadian economy is facing some challenges, and recent data from Statistics Canada suggests that we might be entering a technical recession. We’ve been writing about the possibility of this for years – literally. Tembo’s position was always consistent. With interest rates having been so low for so long, the moment the Bank of Canada chose to raise rates would spell the potential for an economic slowdown. Canadians instinctively understand this reality. We benefitted from low rates, and loose monetary policy gave us economic flexibility in tough times (the 2007-8 recession, COVID, etc.) But many of us knew it couldn’t last forever, and that eventually, we’d have to adjust.

This article will explain what the latest Statscan GDP data means and why it’s happening. We’ll use simple language to break down the situation for you.

A technical recession happens when the economy experiences two consecutive quarters of negative growth. It’s a sign that things are not going well in terms of economic activity. There’s no need to be alarmed yet, it’s important to note that the declines in the economy are still relatively small.

The Current Economic Situation:

According to the latest data, the Canadian economy remains relatively subdued. The latest jobs report released on November 3rd showed very modest overall national job growth, at some 18,000 new jobs created. Ontario lost jobs overall, and manufacturing employment in Canada’s largest province also declined. The preliminary GDP estimates for the third quarter suggests a small national contraction, which could mean a technical recession. We’re not 100% sure that this is the case yet, it’s just an estimate at this point of time.

Why is This Happening?

One of the major factors contributing to this economic slowdown is the rise in interest rates. When interest rates go up, it can discourage people from spending money, especially on high-cost assets. Higher interest rates mean that borrowing money becomes more expensive. Credit card expenses rise, people pull back on eating out, they invest less, they generally will save more and focus on paying down their debt. For those reading who have multiple debt products and lines of credit, consider a Tembo debt consolidation loan to turn several debt payments into one, and many debt products into one centralized, convenient loan. Clearing high interest debt products could raise your credit score.

Andrew Grantham, an expert from CIBC, believes that the Bank of Canada is unlikely to raise interest rates further because of the weak economy. This can be seen as a sign that policymakers are trying to prevent the situation from getting worse. Tembo agrees with this sentiment, and it’s our hope that the Bank of Canada does not continue to raise rates – the economy has slowed considerably, and inflationary pressures are stabilizing (but still not idea, obviously).

What to Expect:

If a recession does happen, it’s usually accompanied by layoffs and higher unemployment rates. However, this time it’s a bit different. Some sectors are experiencing layoffs, while others are trying to hire more people. This means that the quality of employment might change, with higher-paying industries letting people go while lower-paying sectors are still looking for workers. There are still a huge number of job vacancies across the country.

The unemployment rate, at 6.2%, is historically low. High immigration targets by the federal government show a desire to continue plugging those skills gaps and job vacancies with new workers from abroad, as our capacity to train new talent is insufficient. So, the labour market remains relatively strong and healthy, for the time being. There aren’t mass layoffs. Employers are generally looking for workers, not firing them. Not only that, but wages are increasing. Wage growth in October was at 5%. While this is inflationary, it shows how robust the employment situation is.

The Impact of Natural Disasters:

We should also keep the impact of natural disasters on the economy in mind. Forest fires and drought conditions are causing supply disruptions, which can lead to inflation. So, even though these events are slowing down economic activity, they might actually contribute to higher prices for goods and services.

Consumer Spending Affected:

One clear effect of rising interest rates is that consumer spending is taking a hit. Sectors like retail are feeling the pinch, even as the population continues to grow. This suggests that higher interest rates are influencing how people spend their money. Ontario lost almost 30,000 retail and wholesale trade jobs in October.

What’s Next:

The Bank of Canada has decided to keep the key interest rate steady to help the economy. The expectation is that high interest rates will continue to slow down economic growth, especially as more households renew their mortgages at these higher rates.

The Canadian economy is facing some challenges, and the possibility of a technical recession is a concern. Rising interest rates and other factors like natural disasters are contributing to this situation. It’s important to keep an eye on these developments and stay informed about the economy, as it can affect our daily lives, from job opportunities to the cost of living. The next GDP figures will confirm whether the downward estimates panned out. If we do enter an official, technical recession, it will be interesting to see what policies and direction cash strapped governments across Canada take.