Tuesday, December 15, 2015

New rules to the financial game

During the last couple of weeks, the new federal government has introduced two major changes to financial policies that have direct influence on the well-being of Canadians.

TFSA Contribution Limits Reduced 

image: tawcan.com/tfsa-to-be-reduced-to-5500-in-2016/

The fist change is something that the Liberals promised during the recent election campaign, a reduction of the TFSA contribution limit from $10,000 to $5,500 a year, starting in 2016. Nevertheless, when the change was finally implemented, it brought some criticism from all parts of the political spectrum. Although this measure is designed to compensate for the tax cut for the middle class, which is anticipated at a $540 per couple a year savings, many Canadians are disappointed at losing the larger tax free savings contribution. Moreover, as the Toronto Star put it, “what the middle class is getting in a tax cut isn’t as large as what it’s losing in a higher TFSA limit.” The difference between $10,000 and $5,500 a year in contribution will mainly impact middle class families and seniors, exactly the income groups that the current government said they wanted to assist. According to Canada Revenue Agency (via thestar.com), those over 65 years old represent the biggest single age group holding TFSA accounts, 25% of the total number of holders. Although the contribution limit is scaled back in 2016, the 2015 TFSA limit of $10,000 remains effective for the same year and will remain part of one’s lifetime limit if unused in 2015. The Globe and Mail (Rob Carrick in “No need to rush to take advantage of this year’s $10,000 TFSA limit” of December 8) informed that this option, which the government selected to implement its promised TFSA strategy, “is [the] easiest to administer and least likely to further provoke the many people who regard a lower TFSA limit as a serious financial setback.” The $5,500 annual contribution limit, which was effective in 2014 and will be reintroduced in 2016, will be indexed going forward. Depending on inflation, the annual limit will reach $10,000 at some point in the future – the limit will increase by $500 every time the annual contribution limited would be eroded by $250 due to inflation. As of 2015, the cumulative total TFSA contribution room is $41,000.

 Minimum Down Payment on Higher Priced Homes Increased

The other major change in the financial game for many Canadians is the increase to the minimum down payment for new insured mortgages from 5% to 10% for the portion of the house price exceeding $500,000.
This change is clearly aimed at mitigating the hot housing markets in Toronto and Vancouver as the average price for a detached home in Vancouver is currently at more than $950,000 and in Toronto it is around $630,000. This measure is also aimed at first time home buyers primarily who will now need to think more carefully if they can afford to buy pricier homes. During the announcement, Canada’s Minister of Finance Bill Morneau said that, starting February 15, 2016, a buyer of a $700,000 home, who requires a CMHC insured mortgage, would need to have a minimum $45,000 (6.4%) down payment. This change is designed to discourage demand somewhat in the hot Toronto and Vancouver markets. But it is unclear how effective this measure will be in fulfilling this objective as the statistics about the structure of home buyers is quite scarce. If the share of first time buyers, who require insured mortgages, in the $500,000 plus category isn’t significant, it may do little to restrain housing price growth. Many observers are speculating that this price category is dominated by those who buy second and third homes and thus can afford bigger down payments, and also by wealthy buyers who require little if any mortgages. The weak Canadian dollar is luring many non-residents to Toronto and Vancouver real estate markets which, despite the high growth recently, remain cheaper than in places such as New York City, San Francisco and London.

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204

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