The budget for investors, earnings guidance testers and market dissenters

Good morning, unless you like share buybacks. The federal government has decided that rewarding shareholders for their patience is a bad thing and will implement a corporate two-per-cent tax on public company buybacks worth more than $1 million as of Jan. 1, 2024. It’s an estimated cash grab of $2.5 billion over five years, though the Liberals would rather you think of it as an incentive to force energy companies and others to reinvest their profits in themselves instead of shareholders.

The tax may reduce companies’ appetite for share buybacks, which perhaps will translate into more one-off or special dividends. But the likely result is less money for shareholders and, hence, less money for them to reinvest in other Canadian companies and the economy. The government apparently thinks money from buybacks gets buried in mattresses, not redistributed. “As investors use the money from share buybacks from mature companies to reinvest in smaller firms with better growth prospects, a tax on buybacks could lead to a less efficient use of available capital,” says Danny Guérin, a partner at Andersen Canada, in a blog post. “Indeed, the new tax will be hindering buybacks, which is often a tool used to lower volatility.” It’s also a reaction to the one-per-cent tax on stock buybacks announced by United States President Joe Biden in August 2022 as part of the Inflation Reduction Act.

Digging a little deeper into the budget, there is a new tax coming on financial institutions that earn dividends from their Canadian equity holdings. Paul Holden, an analyst at CIBC Capital Markets, says insurers, whose investment portfolios typically include a five-to-10 per-cent allocation to public equities, will likely reduce equity allocations over time, reducing interest in those stocks. The government, meanwhile, expects the new tax to bring in $3.15 billion over five years. 

To be clear, neither of those new taxes directly affect individuals and the Liberals did not reform capital gains taxes, something people fear every year around this time. But they are overhauling the alternative minimum tax (AMT), which richer Canadians sometimes use because it applies a flat 15-per-cent tax rate with a standard $40,000 exemption amount instead of the usual progressive tax rates. Tax expert Jamie Golombek says the new AMT regime includes raising the capital gains inclusion rate to 100 per cent from 80 per cent, increasing the flat tax rate to 20.5 per cent and bumping the exemption to an estimated $173,000 when the new rules kick in for 2024. The government expects the changes to generate an estimated $3 billion in revenues over five years.

One positive for gamblers, er, investors is that the budget proposed to force financial institutions and pension funds to disclose their exposure to cryptocurrency markets since those “threaten the financial well-being of people, national security, and the stability and integrity of the global financial system.” 

Despite all the new revenue-generating tools mentioned above, the federal deficit is still rising to $40.1 billion from last fall’s estimate of $30.6 billion and the debt-to-GDP ratio is up to 43.5 per cent from 42.4 per cent. “This, for an economy that saw nominal GDP growth of nearly six per cent in 2022 and an unemployment rate at a record low of five per cent,” says economist David Rosenberg in one of his morning notes. “Think about that: a fully employed economy at the same time the government is running $40 billion of red ink. You’re supposed to be running a balanced budget at the peak of the economic cycle, you amateurs in Ottawa.” Investors might be feeling something similar once they digest all the changes.

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].

Market volatility making your head spin? Here are 4 key things to remember

The tech wreck in the early 2000s played out over two and a half years, but the pandemic crash was over in a few weeks. Market cycles are shorter these days, with bottoms reached more quickly and recoveries sooner than expected. All of that can make your head spin, but veteran investor Tom Bradley offers four things to keep in mind if you’re watching this quickly changing action a little too closely. 

CYCLING SHORTS

Doom and gloom dominate, but there are options out there for investors who look beyond the noise

Good investors have the fortitude to look for ways to make money in all kinds of markets, something portfolio manager Martin Pelletier says is much easier following corrections. That doesn’t mean completely ignoring risks and going all in, but there are reasonably valued companies out there with solid business models that generate strong free cash flow and earnings in different kinds of environments.

SEEK AND CONQUER

Management takes a knife to earnings estimates — investors should take heed

Many companies are still making money, but their outlooks are dimming. Economists David Rosenberg and Marius Jongstra ran a screen of the 430 S&P 500 companies that have provided forward guidance since the beginning of January and compared the reported data to consensus expectations. They found that the share of missed estimates for sales and earnings was 54 per cent and 68 per cent, respectively, and one of the big misses was by the tech sector.

A CUTTING TAKE

Investors’ latest FOMO trade: companies with the riskiest credit

The latest market winner appears to be companies with the riskiest credit, which were poised for their best week since January versus their sturdier-balance-sheet counterparts. Their sudden popularity is part of a larger pattern in equities this year where harried traders find new vehicles to express their bullish views. Past beneficiaries included tech megacaps, cruise lines and, at one point, even banks.

THE ONLY THING TO FEAR …

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.

If the Fed can’t get it right, why do investors always fall for the folly of forecasting?

No one can predict the weather with any great accuracy, but it’s even harder to forecast where economies and markets are headed. Financial Post columnist Noah Solomon says these predictions are ultimately driven by the decisions of people, who are heavily influenced by psychology and emotions. Yet investors cling to them, especially those that support their own viewpoints.

AGAINST THE ODDS

Gluskin Sheff goes from unique and independent to being part of behemoth RBC

The big often get bigger, but that fact of corporate life doesn’t always sit well when your niche service provider gets swallowed up by a giant, as boutique investment firm Gluskin Sheff did last week. Wealth adviser Ted Rechtshaffen says clients were probably quite pleased by the firm’s original focus on independence, performance fees, investment returns and good marketing. But it became part of Onex Corp. in 2019 and is now part of RBC Wealth Management. What comes next?

EVERY CHAPTER ENDS

What is the best way to invest my money now if I’m expecting an inheritance in 10 to 20 years?

A single mom with two teenage daughters and her brother will inherit an estate that is currently worth $1.5 million. As a result, she wonders whether she should be doing anything differently with her current savings until she retires in 15 years. Certified financial planner Allan Norman says the first step is figuring out how she wants to live her life, but she also needs to keep in mind that the estate may be worth less when her parents die.

GET THE ANSWER

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

Budget’s changes to 3 registered savings plans could affect how you invest this year and beyond

The retooling of the Alternative Minimum Tax system in this past week’s federal budget was big news for high-income earners, but there were also changes that affect many other people’s financial plans. Tax expert Jamie Golombek gives us the latest details on the registered education savings plan, registered disability savings plan and first home savings account.

TAX BENEFITS

More Golombek: If you don’t have time to read, here’s a video on what the federal budget means for your pocketbook

Ottawa couple aiming for simple retirement worry inflation will derail their plans

There comes a day when most people are done with work and want to retire. Sometimes that day comes before you turn 65, so you need a bridge of some sort between now and when your pension and government benefits kick in fully. One reader is 62 and has reached that point in his career, and his financial situation backs him up. But financial planner Ed Rempel and retirement planner Eliott Einarson say things could be even better.

FAMILY FINANCE

Feeling a little unsure about your finances? Turns out, about 78 per cent of Canadians are not financially resilient as measured by their ability to get through financial hardships, stresses and shocks, according to the Financial Resilience Institute. “What we’re seeing is that people are working very hard from a behavioural perspective to reduce their essential expenses and to save as much as they can despite the inflationary environment and the high interest rates,” Eloise Duncan, the institute’s chief executive and founder, tells the Financial Post’s Larysa Harapyn. Canada’s mean financial resilience score in February was 51.24, which is quite similar to the reading for June 2022, but women score four points lower than men.

WATCH THE VIDEO

Good news for Lululemon Athletica Inc. shareholders: The Vancouver-based retailer’s shares on Wednesday jumped as much as 16 per cent, the most since March 2020, after it said it expects full-year sales to grow about 15 per cent to as much as US$9.4 billion, beating the US$9.1-billion analyst estimate compiled by Bloomberg.

Bad news if you are a millennial: More than 100,000 Canadians filed for bankruptcy or insolvency in 2022, but 49 per cent of them were millennials (aged 26 to 41) even though they only make up 27 per cent of adults. Millennials were 1.4 times more likely to file for insolvency than gen-Xers and 1.7 times more likely than baby boomers. Insolvent millennials were on average 33 years old and owed an average of $47,283 in unsecured debt.

Good news for Dollarama Inc. shareholders: The Montreal-based discount chain increased its dividend by 28 per cent to 7.08 cents per share, from 5.08 cents, after fourth-quarter sales increased by more than 20 per cent to $1.47 billion, beating expectations of $1.39 billion. Dollarama’s revenue for the full fiscal year jumped nearly 17 per cent to $5.05 billion. Its shares rose as much as 3.4 per cent on Wednesday following the earnings release.

Bad news if you’re flying somewhere: The federal government is planning to increase the security charge on plane tickets in May to $19.87 from $14.96 on a domestic round-trip flight, while charges will rise to $16.89 from $12.71 for flights to the United States and $34.42, up from $25.91, for other international flights.

Good news if you drink beer: The federal government decided to cap the increase on federal excise duties on beer to two per cent instead of the planned inflation-linked hike of 6.1 per cent, thereby avoiding the largest federal beer tax hike imposed on Canadians in 40 years.

Bad news if you think inflation is easy to tame: TD Economics expects inflation to slow to three per cent this July, from 5.2 per cent in February, but getting it down to the Bank of Canada’s desired two per cent will be much more difficult given the impact of rising wages and demand for services. “For the BoC to achieve its goal of price stability, it needs the current upturn in economic momentum to come to a halt,” says economist James Orlando.

Good news if you owe the CRA the underused housing tax: You’ve been given until Nov. 1, 2023, to remit the annual one-per-cent tax on the value of your vacant or underused housing in Canada. Although April 30 remains the official deadline, property owners will not pay any penalties or interest until after the beginning of November.

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