BJK Financial Group Blog

When the federal government recently announced their changes to the capital gains tax a lot of stories popped up about how it would affect ownership of the family cottage. Because, almost by definition, it is not your primary place of residence, that family cottage you have owned forever will be subject to capital gains tax someday.

If you choose to sell your parents’ cottage while settling the estate, then figuring out capital gains is fairly straight forward – sale price minus cost. And cost is calculated as purchase price plus money spent on capital improvements. Any documentation you can provide for each of these items will help immensely.

All of that is also true if you keep the cottage in the family while settling the estate. You will need to get an assessment of the cottage’s fair market value (FMV) either through a real estate agent familiar with the marker or a licenced and certified appraiser.

And other time you sell your cottage you will need to work out the capital gains the same way you would if selling it for estate purposes.

But then, each case is different, so you need to talk to your tax advisor to know how best to proceed.

Going to the cottage – Do I or don’t I want to own a summer getaway

Along with all of the discussion about capital gains, there has been plenty of general discussion over the last couple of years about owning a cottage. The idea of working remotely that became so common during COVID triggered an active interest in cottage properties. And increasing mortgage rates had their own impact on the market as well.

Then this spring, the rise in the capital gain tax rate triggered a whole new series of conversations about selling and buying your cottage property. As long as you couln’t claim it as your primary residence, it was going to be considered for capital gains.

One more reason to look for good professional advice.

But maybe ownership isn’t the only way

It seems like most conversations about cottage life assume that you own that cozy log cabin by the lake. But it doesn’t have to. If you can only get away for a couple of weeks a year, then it may be much more sensible to rent.

Ownership takes time and money. Can you afford to buy your dream cabin and maintain it? Maintenance will require both time and money. Keep that in mind. You are taking on the responsibility of a second home. Along with the chance to have a place to get away from it all is the need to maintain that place too.

Another option could be joint ownership. Be careful of that and make sure you fully work out how to handle whatever chaos might come your way. And make sure you truly trust anyone else you are doing this with.

And we haven’t even talked about renting out your cottage in order to earning a bit of extra income…

There are lots of options. Pop open a cold one and take a moment before you just jump right in.

Summer is here. Let’s enjoy it no matter what

I hope I have given some useful things to think about as cottage season kicks into full gear. As part of your wider financial outlook, having a cottage as a second property has benefits as well as challenges. Feel free to reach out to discuss this or anything else in your financial plan. I would love to help. As usual, you can call me at (519) 279-0186 or send me a note at [email protected]

And above all else, have a happy summer.

The Bank of Canada (BoC) recently made headlines with its decision to cut the policy interest rate by 25 basis points, bringing it down to 4.75%. This move, announced on June 5, 2024, marks the first rate cut since March 2020 and has significant implications for the Canadian economy, particularly for borrowers and investors. As a financial advisor, I want to shed light on the reasons behind this decision, its immediate impacts, and the potential for further rate cuts in the near future.

Reasons Behind the Rate Cut

The primary driver for the BoC's rate cut is the significant cooling of inflation. Over the past year, Canada has witnessed a gradual decline in inflation from the decades-high levels seen in 2022. The BoC's aggressive monetary tightening during that period has played a crucial role in curbing inflationary pressures. Governor Tiff Macklem highlighted that the "considerable progress" made in taming inflation should be "welcome news" to Canadians, as it indicates that the central bank's efforts are bearing fruit (Bank of Canada) (Global News).

Economic data also supported the decision to cut rates. Canada's GDP growth for the first quarter of 2024 was weaker than expected, and the labor market has shown signs of loosening. These factors, combined with the global trend of central banks easing monetary policies, contributed to the BoC's confidence in reducing the policy rate without jeopardizing price stability (Global News).

Immediate Impacts on Borrowers

One of the most immediate and noticeable impacts of the rate cut is on borrowers, particularly homeowners with variable-rate mortgages and those with other types of debt tied to the central bank's policy rate. These borrowers will see their interest rates drop by 25 basis points, translating to lower monthly payments. For instance, a homeowner with a variable-rate mortgage of $650,000 on a $700,000 home would see their monthly payments decrease by approximately $100 (Global News).

This rate cut is a welcome relief for many Canadians who have endured higher borrowing costs during the BoC's tightening cycle. It provides much-needed breathing room for households, especially those with significant debt. However, it also presents a dilemma for prospective homebuyers and those renewing their mortgages. With variable-rate mortgages typically offering higher rates than fixed-rate options, the choice between the two becomes more complex. Borrowers need to carefully consider their expectations of future rate cuts and their financial situations before making a decision (Global News).

Potential for Further Rate Cuts

Looking ahead, there is a possibility of additional rate cuts by the BoC. Economists are divided on the timing, with some expecting another cut as early as July if inflation continues to cool. The BoC's next rate announcement is scheduled for July 24, and it will be accompanied by updated economic forecasts. If inflation and economic data continue to align with the BoC's targets, we could see further easing of monetary policy (Yahoo Finance).

However, the path forward is not without risks. The BoC is mindful of potential upward pressures on inflation from factors such as rising home prices and global economic uncertainties. Governor Macklem emphasized the need for caution, stating that the central bank would continue to monitor wage growth, inflation expectations, and corporate pricing behavior closely (Yahoo Finance).

Conclusion

The BoC's recent rate cut is a significant step towards supporting the Canadian economy amid a backdrop of cooling inflation and slower economic growth. For borrowers, this move offers some financial relief, but it also necessitates careful consideration of future financial decisions. As we await the BoC's next moves, staying informed and adapting strategies to the evolving economic landscape will be crucial.

For more detailed information, you can read the full article on the BoC's rate cut here.

By staying informed and making prudent financial decisions, we can navigate these changes effectively and take advantage of the opportunities they present.

Feel free to reach out if you have any questions or need personalized advice on how these changes might affect your financial plans.

Source: The Canadian Press. Published April 4, 2024.

The recent forecast by the Canada Mortgage and Housing Corp. (CMHC) predicting home prices reaching peak levels by next year and potentially setting new highs by 2026 has significant implications for families across Canada. As a financial advisor, it's essential to analyze the potential impact of these projections on family finances and provide insights into effective budget planning strategies.

Main Points:

Affordability Concerns: The CMHC report highlights affordability challenges in the home ownership market for the next three years. Despite a recent decline in home sales and prices, the forecasted decline in mortgage rates and robust population growth are expected to drive a rebound in home sales and prices. This could make it increasingly difficult for families to afford homeownership, especially in regions with high demand and limited supply. Families may need to reassess their budget priorities and consider alternative housing options to maintain financial stability.

Rental Market Dynamics: Despite an increase in rental housing supply projected for 2023, the CMHC suggests that supply may not keep pace with demand, leading to higher rents and lower vacancy rates. This could significantly impact families who rely on rental accommodation, as higher rental costs may strain their budget allocation. Families renting homes may need to anticipate potential rent increases and incorporate them into their long-term budget planning to ensure financial security.

Housing Starts and Construction Trends: The CMHC forecasts a decline in housing starts in Canada for the current year, with a potential recovery in 2025 and 2026. This reflects the lagged effect of higher interest rates on new construction. Understanding these trends is vital for families considering homeownership or investing in real estate. It implies potential delays in new construction projects, which could influence housing availability and prices in the future. Families planning to purchase newly constructed homes may need to adjust their timelines and expectations accordingly.

Impact on Family Finances and Budget Planning:

• Evaluate Housing Options: Families should carefully assess their housing needs and explore various housing options, including renting versus homeownership. Conducting thorough research on local housing market trends and affordability metrics can help families make informed decisions aligned with their financial goals.
• Budget Flexibility: Given the projected fluctuations in housing costs, maintaining a flexible budget is crucial for families to adapt to changing financial circumstances. Allocating a portion of the budget towards housing-related expenses, such as rent or mortgage payments, while also prioritizing savings and emergency funds, can provide a buffer against unexpected costs.
• Long-Term Financial Planning: Incorporating housing market projections into long-term financial planning is essential for families aiming to build wealth and achieve financial security. Consulting with a financial planner can help families develop comprehensive financial strategies tailored to their specific goals, risk tolerance, and market conditions.

In conclusion, the CMHC's report on projected home price peaks emphasizes the importance of proactive financial planning for families. By understanding the implications of these projections and implementing strategic budget planning measures, families can navigate the evolving housing market landscape with confidence and ensure their long-term financial well-being.

I have been writing about the challenges facing first-time Canadian home buyers for a couple of years now. Most of my thoughts have centered around the tax-free First Home Savings Account (FHSA). It is not the same thing as the First-Time Homebuyer Incentive (FTHBI) that the Canada Mortgage and Housing Corporation (CMHC) closed last week. And from everything I have read about the program it was not all that popular and not a lot of families used it to help with the purchase of their first home. So…

When CMHC launched the FTHBI they had a stated goal of 100,000 approved buyers by March of 2025. But according to a graph reproduced in a CBC story describing the program’s cancellation it had only around 18,500 participants by 2022 and the growth the program was demonstrating offered no sense that it would ever come close to achieving its goal. In fact, the story went on to describe how the Toronto mortgage broker who agreed that "We had a lot of young Canadians asking about this program" but only two of her clients ever qualified.

Why did the FTHBI fail?

Common complaints about the program were that it had upper limits on household incomes for qualified participants. For instance:

• The household income ceiling was $120,000
• You had to already have the minimum down payment saved up
• Your maximum mortgage could not exceed four times your income (ie. Not greater than $480,000)
•  The federal contribution was considered equity in the home, payable upon its sale (commensurate with the price of the house when it’s sold)

Even when I listed average real estate prices in Kitchener last August, even a condominium cost more than $480,000. Less as your income dipped below the income threshold.

In addition, income and mortgage maximums were somewhat higher in the costliest cities of Toronto, Vancouver and Victoria.

The fact that CMHC would have equity in the home was especially troublesome for many people who looked into it and ended up seeking other options.

In the end, the program did not serve the needs of first time home buyers and it basically got cancelled due to lack of interest.

 So, let’s go back to the FHSA

The FHSA was a new program introduced last April. I guess that means the program will soon reach its first anniversary. And as I described it last fall, the program works like an RRSP. It is tax-deductible and has a lifetime limit of $40,000 and yearly limits of $8,000.

And then there is also the Home Buyer’s Plan that allows for transfers from your RRSP. And just to be clear, you can do that with your FHSA too.

The important thing is that with all of these conditions and qualifications (some set by the financial institution you have the funds with) you really do need to consult with your advisor for the proper advice for your situation. Because every situation is different.

Buying a house is a big financial decision. Make sure you understand all your options

The demise of the FTHBI demonstrates how difficult it can be to offer the right help in Canada’s ever changing real estate market. And maybe the FHSA will be able to help Canadian’s more effectively. 

Whatever else, it is still a challenging experience. Figuring out the financial details - on top of finding a home that you can afford and enjoy - can be stressful. Finding the right professionals to help you through the process - like real estate agents and financial advisors - will help you make the best of a situation that can be both exciting and stressful. If you want to talk through your options, please feel free to text or call me at (519) 279-0186 or email me at [email protected]. You don’t need to go through this alone.

Well, it’s time once again to finalize our income taxes and that includes reviewing and topping up our RRSP contributions for the previous tax year. So, as you look over your tax bill for 2023, I want to help you think a few things over. There is so much information out there that seems contradictory and can end up just confusing you. I would like to think that I can help you make sense of it.

How much money do I need?

One of the most common questions I get from clients is: “How much money do I need to put into my RRSP for retirement?” It’s a sensible question and here’s a sensible answer.

If you look at the income statement I have included here, you will see a trial account with $700,000. This account is set up with monthly withdrawals of $3,000 and an expeceted rate of return of 5%. This is a reasonable rate of return to count on over the long haul. As all of us know, rates of return our investments constantly fluctuate and are affected by many factors. Some of those factors are within our control and some are not. It’s what makes so much of this so “interesting”.

As you can see from this test result there is enough money in the account to last for 30 years - in this scenario from age 65 to age 95. Of course, this would not be your total income as you will also have CPP, OAS, and whatever money you can find stuck between the cushions of the couch.  

As you can also see, this is based on a tax rate of 35%. It’s important to point out here that when you take money out of your RRSP it is considered taxable income. The reason we scramble to put money into our RRSPs at this time of the year is that any money set aside deducted from our taxable income for the current tax year, up until the end of February of the following year. Money put aside in an RRSP is considered deferred tax money, and when you take that money out during retirement, then you will have to pay the tax on it then.

That’s different from a TFSA (Tas Free Savings Account). Money you put into your TFSA does not affect your taxable income for that year, so you don’t have to run around putting money into it just before tax time. Just like your RRSP none of the savings that build up in the plan are taxed. But the difference is that when you eventually take money out of your TFSA, you do not have to pay any income tax on it, no matter whether we are talking about the original principal or any increased savings that have built up since.

Here is a retirement income calculator you can use to get an even better idea of where your savings are and how well you might be doing in comparison to what you hope to achieve.

Every case is different. Let’s talk.

I know this is just the beginning. While you may be in a hurry to make this year’s RRSP contribution in time for your 2023 tax return, it’s also important to set things up for the long haul. And we can work together on both those goals.

So, let’s get started. Give me a call at (519) 279-0186, email me at [email protected], or visit my website at www.bjkfinancialgroup.ca. I look forward to chatting with you.