Budget preview, banking sector askew and an RRSP taboo

Good morning. If the latest banking crisis has you feeling a little agitated, you might want to consider moving to Edmonton. Alberta’s capital is the best place to survive a zombie apocalypse, according to a recent survey by the Rentola.ca rental home search engine, which makes sense given it’s in the middle of wilderness and zombies move slower when it’s extremely cold. Let’s face it, though, Canada’s Big Six are on pretty solid footing even if their share prices are in the dumper along with banks everywhere else. There’s plenty of banking stuff below, but let’s switch our attention to the looming federal budget, especially since inflation is slowing down, although that’s largely due to math and doesn’t really apply to food, and the United States Federal Reserve has now made its controversial decision to raise its interest rate 25 basis points, perhaps the last hike for a while.

The Liberals will roll out their budget on Tuesday, March 28, and have been flagging that they will be “fiscally responsible” while doling out a whole lot of cash on the new green economy. Not sure those two things are compatible, but unless you enjoy getting agitated about things that don’t really affect your day-to-day life, you’re probably more interested in what the feds have in store for your personal finances, whether it’s tweaks to retirement savings programs, capital gains tax reform or even some increased bank deposit guarantees.

One thing tax expert Jamie Golombek is watching is whether the NDP’s pre-election proposal to increase the top tax rate by two percentage points to 35 per cent will kick in for those earning $235,675 or more. Anti-taxers often say any increase on the wealthy will push them out of the country, but United States President Joe Biden has promised to raise the top tax rate by 2.6 percentage points to 39.6 per cent, albeit that only applies on income of more than US$400,000. Nevertheless, if you’re rich, you could be spending even more time with your accountant looking for shelters and loopholes.

The same logic applies to increasing the capital gains tax. The higher the rate, the more entrepreneurs will look elsewhere to set up shop — or so the argument goes. “Getting Canada’s most successful entrepreneurs, business owners and investors to invest more and to develop more businesses in Canada is key to our future prosperity. Higher taxes won’t help,” say Fraser Institute economists Jason Clemens and Jake Fuss. Others disagree. Simon Fraser University professor emeritus Rhys Kesselman wants a return to higher capital gains taxes to ensure higher-income earners pay their “fair share.”

Capital gains tax reforms might not just affect the rich, since there have been rumours the government will take away the principal residence exemption one day. But perhaps of more immediate concern to many, given the current banking crisis, is some sign that the federal government will raise the amount of money that is insured in your financial accounts. Today, that limit is $100,000 per account, per institution, but the U.S. protects its depositors for up to US$250,000 per account, nearly 3.5 times what the Canadian Deposit Insurance Corp. (CDIC) offers once you factor in the exchange rate. 

Securing existing funds is of critical importance to seniors who may not have time to raise more money should their bank go belly-up and their funds disappear. “A substantial part of their savings is likely at risk with such a low threshold of CDIC protection,” says Anthony Quinn, a spokesperson for the Canadian Association of Retired Persons. About 65 per cent of deposits at the Big Six banks are insured, but only 25 per cent are uninsured at the mid-sized and small banks, according to DBRS Morningstar.

Seniors are also highlighted in the C.D. Howe Institute’s 2023 Shadow Budget, which contains four measures designed to help Canadians save more for retirement and stop forcing them to draw those savings down faster than is prudent. Among the think-tank’s proposals are raising the registered retirement savings plan limit to 30 per cent of income earned, increasing the age you have to start drawing funds down from tax-protected accounts to 74, reducing all minimum withdrawals from registered retirement income funds by one percentage point per year and allowing purchases of annuities in tax-free savings accounts.

Those four suggestions seem like good ideas, but if following all the new spending proposals and possible tax changes in the budget is too overwhelming, just move to Edmonton and hunker down. I hear the meat tastes great.

Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].

5 burning questions investors have right now including the safety of their deposits

Smart investors always have questions, and veteran investor Peter Hodson’s team has answered more than 155,000 of them in the past decade. But with all the market craziness during the past couple of weeks, it’s a good time to look at five of the most popular recent ones, including whether your banking deposits are safe and whether you should buy stocks that are trending downward.

FIVE ALIVE QUESTIONS

Banking, energy selloffs opportunities for investors with the courage to be contrarians

Energy stocks are getting hit as the banking fallout threatens the economy, which was already under a recession watch. But the good news is that the global economy is still on a reasonable footing, inflation is dropping and employment is still high. Portfolio manager Martin Pelletier isn’t bowing to the market fear and is instead using the ongoing correction in the banking and energy sectors to maintain his positioning in these segments.

DO THE OPPOSITE

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

Bank crisis survivors remember how fast dominoes can fall

The odds of a recession may be way up, but authorities are better equipped today to deal with stress in the financial system, and the largest banks are stronger than they were in previous crises. But for the current class of investing professionals who seem largely unperturbed by recent events, there are important messages to be gleaned from the first-hand accounts of veterans of past banking fallouts. One of the biggest is that things can unfold in ways that seemed inconceivable just weeks earlier.

REASONS TO BE WARY

Even if this banking crisis is not a repeat of 2008, it won’t be a picnic

Banking sector crises, whether created by unjustified fears or not, only end with a catalyst, such as government-forced mergers, bailouts or even private saviours such as Warren Buffett, who helped save Goldman Sachs Group Inc. in 2008. Economist David Rosenberg says the first round of responses hasn’t done squat to stem the problem, so he’s still looking for a measure, or measures, that bolster everyone’s confidence.

BANK YOUR HOURS

More Rosenberg: Brace yourself, the Fed is signalling that a three-quarter recession will start in two weeks.

The classic 60/40 portfolio took a beating last year because rising inflation and subsequent interest rate hikes sparked an equity selloff and bond prices dropped. But that’s changing again as interest rate hikes slow down and volatility steps up. “Over the past 10 or 11 years, equity markets have been up and to the right, so anything defensive detracted from overall results even though it continued to help on the volatility front,” Hilda Applbaum, portfolio manager at Capital Group tells the Financial Post’s Larysa Harapyn. She points out that equities give you growth and can act as an inflation hedge, while bonds calm the jitters.

WATCH THE VIDEO

What are the next steps for saving and investing now that I’ve paid off my student debt

Paying off a big debt is a great moment in someone’s life, but now what? How do you best use that newly available cash stream? Certified financial planner Janet Gray says it’s important to clarify the difference between saving, or protecting your money so it doesn’t decrease in value, and investing, which is for funding longer-term goals and future use. But you first need to figure out what you need the money for and when.

GET THE ANSWER

If you have an investing or personal finance question, hit us up at [email protected].

Taxpayer takes the CRA to court after it dings him for an RRSP overcontribution tax due to a bank error

First-time homebuyers will soon be able to take advantage of the tax-free first home savings account, and even combine it with the existing Home Buyers’ Plan (HBP). But tax expert Jamie Golombek says it’s important to follow the rules of the HBP or you could end up in hot water with the Canada Revenue Agency, as one taxpayer recently discovered even though the error wasn’t his fault.

DETAILS, DETAILS, DETAILS

3 reasons why it’s worth filing your tax return even if you don’t owe any money

No one likes to file their tax return, but chances are you will get a refund this year, as have 66 per cent of the 3.7 million returns processed since the start of this year’s tax filing season. But credit counsellor Sandra Fry says there are other reasons to file a return every year, from qualifying for income-tested programs and services to creating more registered retirement savings plan contribution room.

JOY AND PAIN

Getting divorced? Here’s how to prepare your finances and protect your assets

More than 40 per cent of marriages in Canada end in divorce, something that affects your lifestyle, housing and financial goals, especially if you have children to consider. Wealth and investing adviser Ida Khajadourian says separating emotions from critical financial decisions is complicated, but necessary when uncoupling and planning for future security.

DO THE SPLITS

Imagine being reassessed by the Canada Revenue Agency and receiving a $1.2-million bill for penalties and unpaid taxes. Chances are you’d appeal, but you probably wouldn’t hold out too much hope of having it completely wiped out. But David Goldhar, a toy salesman, did just that and won his case at the Tax Court of Canada, after the CRA reassessed him for the 2006 to 2013 tax years following the publication of the Panama Papers. “It is also my view that the care he exercised (when filing) was that of a wise and prudent person,” the judge said in his decision.

Good news if you’re a Parkland Corp. shareholder: Activist investor Engine Capital LP is urging the Calgary-based gas-store chain to look at strategic alternatives including the sale or spinoff of non-core assets as it is “particularly troubled by Parkland’s staggering underperformance” compared to Alimentation Couche-Tard Inc. Parkland shares rose as much as 9.9 per cent on March 22 after Engine Capital made its desire known.

Bad news for energy investors: Brent’s December–to-December spread, a key oil-trading gauge, narrowed to its weakest level since December 2021, amid fears of long-term diminished demand. Even Goldman Sachs Group Inc., the oil market’s most ardent bull, no longer sees oil reaching US$100 a barrel this year.

Good news if you’re tired of high prices: The liquidation sale at six Nordstrom Inc. stores and seven Nordstrom Rack outlets across Canada began March 21 after the Ontario Superior Court of Justice gave it permission to start selling off its merchandise. However, you might want to wait a few weeks as current markdowns are only a paltry five per cent.

Bad news if you’re a Block Inc. shareholder: Its stock dropped as much as 18 per cent after short-seller Hindenburg Research alleged the payments company facilitated fraudsters who took advantage of government stimulus programs during the pandemic in a report distributed on Twitter, a company co-founded by Block founder Jack Dorsey. 

Good news if you earn a paycheque: Your salary increase may finally be outpacing inflation for the first time in two years. Inflation rose 5.2 per cent in February from a year earlier, while the average hourly wage of workers aged 15 and older increased 5.4 per cent during the same time period.

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