Withholding tax rates around the world

Chart legend:
Interest - applicable to interest income from:

• non-registered GICs (include MVA)
• non-registered life insurance policies:
  • Dividends on Deposit,
  • Withdrawable Premium Fund (WPF) /Overflow Fund,
  • Delayed Claim Interest
• non-registered deferred annuities
  • Delayed Claim Interest (i.e. GIAs and AAs)
  • Interest from Date of death to date of settlement for death claims
• non-registered Payout Annuities
  • Delayed Claim Interest
• RRIF
  • Interest from date of death to date of settlement for death claims

Dividend - applicable to dividends from non registered Canadian outside SPIO (stock purchase investment option) only
Trust - applicable to mutual funds distribution, segregated fund income allocation and employee profit sharing plan trust income
Lump Sum Pension - applicable to lump sum withdrawal from:

• RPP
• DPSP
• RRSP
• RRIF (amounts greater than 2 x minimum or 10% of value @ Jan 1)
• withdrawal of commuted value from registered payout annuity at death

Periodic Pension - applicable to annuity payments from registered source

• RPP - scheduled payments
• DPSP - scheduled payments
• RRIF - 2 x minimum or 10% of value @ Jan 1, whichever is greater
• Payout Annuities - RPP, DPSP, RRSP scheduled payments

Lump Sum Annuity - applicable to the taxable portion of:

• non-registered AA/IA if the annuitant was a non-resident at issue
• non-registered payout annuity - commuted value

Periodic Annuity - applicable to taxable portion of scheduled payments from non-registered payout annuity
Foreign Income - applicable to foreign non business income and foreign interest from non registered foreign outside SPIO only
For payments from Canada:

Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	Income Averaging Annuity Contract	Foreign Income
Algeria	Y	15	15	25	25	15	25	15	15	25
Argentina	Y	12.5	15(1)	25	25	15	25	15	15	25
Armenia	Y	10	15	25	25	15	25	15	15
Australia	Y	10	15	15	15	15	15	15	25	25
Austria	Y	10	15	15	25	25	25	25	25	25
Azerbarjian	Y	10	15	15	25	15	25	15	15
Bahamas	N	25	25	25	25	25	25	25	25	25
Bahrain	N	25	25	25	25	25	25	25	25	25
Bangladesh	Y	15	15	25	25	15	25	15	25	25
Barbados	Y	15	15	15	25	15	25	15	25	25
Belgium	Y	10	15	15	25	25	25	25	25	25
Belize / Leeward / Windward Islands	N	25	25	25	25	25	25	25	25	25
Bermuda	N	25	25	25	25	25	25	25	25	25
Brazil	Y	15	25	25	nil/25(2)	nil/25(2)	nil/25(2)	nil/25(2)	nil/25(2)	25
British Virgin Islands	N	25	25	25	25	25	25	25	25	25
Bulgaria	Y	10	15(3)	15	25	15	25	10	10	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Cameroon	Y	15	15	25	25	25	25	25	25	25
Cayman Islands	N	25	25	25	25	25	25	25	25	25
Chile	Y	15	15 (4)	15	25	25	25	15	15	25
China	Y	10	15 (5)	25	25	25	25	25	25	25
Columbia	N	25	25	25	25	25	25	25	25	25
Common Wealth of Ind States	N	25	25	25	25	25	25	25	25	25
Costa Rica	TBD
Republic of Croatia	Y	10	15	15	25	nil/15 (6)	25	10	10	25
Cuba	TBD
Cyprus	Y	15	15	15	25	nil/15 (7)	25	15	25	25
Czech Republic	Y	10	15	15	25	15	25	15	15	25
Denmark	Y	10	15	15	25	25	25	25	25	25
Dominican Republic	Y	18	18	18	25	18	25	18	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Ecuador	Y	15	15	15	25	15 (on amounts over $12,000)	25	15	15	25
Egypt	Y	15	15	15	25	25	25	25	25	25
Estonia	Y	10	15	15	25	15	25	10	10	25
Finland	Y	10	15	15	25	20	25	15	25	25
France	Y	10	15	15	25	25	25	25	25	25
Gabon	Y	10	15	25	25	25	25	25	25	25
Germany	Y	10	15	25	25	15	25	25	25	25
Greece	N	25	25	25	25	25	25	25	25	25
Grenada	N	25	25	25	25	25	25	25	25	25
Guyana	Y	15	15	25	25	25	25	25	25	25
Holland (see Netherlands)
Hong Kong	N	25	25	25	25	25	25	25	25	25
Hungary	Y	10	15	15	25	15	25	10	10	25
Iceland	Y	10	15	15	25	15 (8)	25 (8)	15	15	25
India	Y	15	25	15	25	25	25	25	25	25
Indonesia	Y	10	15	25	25	15	25	15	25	25
Ireland	Y	15	15	15	15	15	15	15	nil	25
Israel	Y	15	15	15	25	15	25	15	25	25
Italy	Y	15	15	25	25	15 (9)	25 (9)	25	25	25
Ivory Coast	Y	15	15	25	25	15	25	15	15	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Jamaica	Y	15	15	15	25	25	25	15	25	25
Japan	Y	10	15	25	25	25	25	25	25	25
Jordan	Y	10	15	25	25	25	25	25	25	25
Kazakhastan	Y	10	15	25	25	15	25	25	25	25
Kenya	Y	15	25	25	25	15	25	15	25	25
Korea (South)	Y	10	15	25	25	15	25	10	25	25
Kuwait	Y	10	15	25	25	15	25	15	25	25
Kyrgyzstan	Y	15	15	15	25	15	25	15	15	25
Latvia	Y	10	15	15	25	15	25	10	10	25
Lebanon	Y	10	15	25	25	15	25	25	25	25
Liberia	Y	20	15	20	25	25	25	20	25	25
Liechtenstein	N	25	25	25	25	25	25	25	25	25
Lithuania	Y	10	15	15	25	15	25	10	10	25
Luxembourg	Y	10	15	15	25	25	25	25	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Malaysia	Y	15	15	15	25	15	25	15	25	25
Malta	Y	15	15	15	25	15	25	15	25	25
Mexico	Y	15	15	15	25	15	25	15	15	25
Moldova	Y	10	15	15	25	15	25	15	15	25
Mongolia	Y	10	15	15	25	15	25	15	15	25
Morocco	Y	15	15	25	25	25	25	25	25	25
Netherlands	Y	10	15	15 (10)	25	15	25	15	15	25
Netherlands Antilles	N	25	25	25	25	25	25	25	25	25
New Zealand	Y	15	15	15	15	15 (11)	25 (11)	15	25	25
Nigeria	Y	12.5	15	25	25	25	25	25	25	25
Norway	Y	10	15	15	25	15	25	15	15	25
Oman	Y	10	15	25	25	15	25	15	15
Pakistan	Y	15	15	15	25	25	25	25	25	25
Panama	N	25	25	25	25	25	25	25	25	25
Papua New Guinea	Y	10	15	25	25	15	25	15	25	25
Peru	Y	15	15	15	25	15	25	15	15	25
Philippines	Y	15	15	25	25	25 (12)	25	25	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Poland	Y	15	15	15	25	15	25	15	25	25
Portugal	Y	10	15	15	25	nil/15 (13)	25	15	15	25
Puerto Rico	N	25	25	25	25	25	25	25	25	25
Romania	Y	15	15	15	25	15	25	15	25	25
Russia	Y	10	15	25	25	25	25	25	25	25
Saudi Arabia	N	25	25	25	25	25	25	25	25	25
Senegal	Y	15	15	15	25	15% (on amounts over $12,000)	25	15	15	25
Seychelles	N	25	25	25	25	25	25	25	25	25
Sierra Leone	N	25	25	25	25	25	25	25	25	25
Singapore	Y	15	15	15	25	25	25	25	25	25
Slovak Republic	Y	10	15	15	25	15	25	15	15	25
Slovenia	Y	10	15	15	25	15	25	10	10	25
South Africa	Y	10	15	15	25	25	25	25	25	25
Spain	Y	15	15	15	25	15	25	15	25	25
Sri Lanka	Y	15	15	15	25	15	25	15	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Sweden	Y	10	15	15	25	25	25	25	25	25
Switzerland	Y	10	15	15	25	15	25	15	25	25
Taiwan	N	25	25	25	25	25	25	25	25	25
Tanzania	Y	15	25	25	25	15	25	15	15	25
Thailand	Y	15	15	15	25	25	25	25	25	25
Trinidad / Tobago	Y	10	15	25	25	15	25	25	25	25
Tunisia	Y	15	15	15	25	25	25	25	25	25
Turkey	N	25	25	25	25	25	25	25	25	25
Ukraine	Y	10	15	15	25	25	25	25	25	25
United Arab Emirates	Y	10	15	15	25	25	25	25	25	25
United Kingdom	Y	10	15	15	25	nil	25	10	25	25
Uruguay	N	25	25	25	25	25	25	25	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
USA	Y	10	15	15 (14)	25	15 (14)	25	15	25	25
Uzbekistan	Y	10	15	25	25	25	25	25	25	25
Vietnam	Y	10	15	15	25	15	25	25	25	25
Venezuela	Y	10	15	25	25	25	25	25	25	25
Virgin Islands (US)	N	25	25	25	25	25	25	25	25	25
Yugoslavia	N	25	25	25	25	25	25	25	25	25
Zambia	Y	15	15	15	25	15	25	15	25	25
Zimbabwe	Y	15	15	15	25	15	25	15	15	25

¹ Argentina: Dividends are taxed at 10% if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividend; 15% in all other cases.
² Brazil: Pension and periodic annuity payments - the first $4,000 paid in a calendar year is exempt.
³ Bulgaria: Dividends - for a non-resident owned investment corporation resident in Canada, withholding tax is at the rate of 10% if the beneficial owner is a company which controls directly or indirectly at least 10% of the voting power in the company paying the dividends.
⁴ Chile: Dividends - if the beneficial owner is a company that controls directly or indirectly at least 25% of the voting power in the company paying the dividends, withholding is at 10%; otherwise withholding is at 15%.
⁵ China: Dividends - if the beneficial owner is a company that controls directly or indirectly at least 10% of the voting power in the company paying the dividends, withholding is at 10%; otherwise withholding is at 15%.
⁶ Croatia: For pension payments, the first $12,000 CDN or equivalent in Croatian currency is exempt from tax.
⁷ Cyprus: Pension payments are only taxed on the excess of the basic amount of $10,000.
⁸ Iceland: Pension payments are only taxable in Iceland provided the total amount of pension paid in the year does not exceed $24,000 CDN or equivalent in Icelandic krones.
⁹ Italy: For pensions, nil if the amount is less than $10,000.
¹⁰ Netherlands: Income from a Trust is exempt from withholding tax if it is derived from sources outside the country in which the trust is resident.
¹¹ New Zealand: Pensions are taxable on the full amount only when payment exceeds $10,000.
¹² Philippines: Periodic pension payments arising in the Philippines are taxed at 30% on the amount in excess of $5,000.
¹³ Portugal: For periodic pension payments, tax is 15% of the amount in excess of $12,000 CDN or eqivalent Portuguese currency.
¹⁴ USA: Income from a Trust is exempt from withholding tax if it is derived from sources outside the country in which the trust is resident.
Under Article XVIII, Paragraph 3, the term "pensions" includes amounts paid under a sickness, accident or disability plan.

Published: 04/12/2009

 

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October 2011: Monthly Indicator Recap

HOUSING INDICATORS*	DIRECTION	% CHANGE (vs. last month)	OCTOBER LEVELS
Volume of MLS® Home Listings		0.26%	72,739
Volume of MLS® Home Sales		1.26%	38,819
Average MLS® Sale Price (Canada)		0.65%	$363,504
ECONOMIC INDICATORS**	DIRECTION	% CHANGE (vs. last month)	RATES
Unemployment Rate (October 2011)		0.20%	7.30%
GDP (August 2011)		0.30%	N/A
Retail Sales (August 2011)		0.50%	N/A
Consumer Price Index (September 2011)		3.20% (Year‐o‐year, September)	N/A
FINANCIAL INDICATORS	DIRECTION	% CHANGE (vs. last month)	RATES
Prime Rate**		0.00%	3.00%
5 Year Fixed Posted Mortgage Rate***		0.10%	5.29%

MLS® is a registered certification mark owned by The Canadian Real Estate Association.
*Seasonally adjusted month-to-month results; Source: The Canadian Real Estate Association
** Source: Statistics Canada
*** Source: RBC

European stress levels reaching a boiling point

Funding stress levels in the European zone are slowly inching towards an unsustainable situation as different credit markets across the continent are showing signs of faltering. The big news overnight is that Germany held a Bunde auction which could only be described as a disaster. With yields touching 2% on their 10 year note, returns were not enough to entice investors as the German Bundesbank had to purchase 39% of the offering so that the auction would not fail. While this is not the same situation as the peripheral countries, in the sense that they do not have to pay loan shark rates on their debt, it is a sign that investors would rather hoard their cash rather than being in any sort of debt security.
We are all aware the off the stress going on in the sovereign debt market but the other devil quietly lurking in the shadows is the interbank funding market. Banks primarily fund their activities through the use of the overnight market where they either borrow money if they are short or park money if they are over funded. The failure of this market is what ultimately brought down Lehman in 2008 as they were not able to fund their day to day operations. The London Interbank Overnight Rate (LIBOR) is the main rate and it has been slowly creeping since the beginning of summer. The European banks that are in better shape have significantly pulled back their operations in the overnight market while the struggling ones are in increasing need of it. This is creating a negative feedback loop where rates are continually rising and liquidity is continually falling. It is these secondary credit markets that can provide the early warning signs of a banking crisis.
The Euro has taken a beating overnight as seemingly continuous barrage of damaging news will not let the currency catch a breather. The common currency is down 3.4% on the month and 6% from its high of 1.4247 on Oct 27th. The downward trend channel is holding strong and the failure of the US debt committee couldn’t even help the Euro out. It will be up to the politicians to figure out a way to calm the market but their track record so far is not reassuring.

Revenu Québec - Contribution Paid by the Employee to a Private Health Services Plan (Group Insurance Plan) - Tax News - Information Centre

Revenu Québec - Contribution Paid by the Employee to a Private Health Services Plan (Group Insurance Plan) - Tax News - Information Centre

November 8, 2011

Contribution Paid by the Employee to a Private Health Services Plan (Group Insurance Plan)

A tax credit for medical expenses may be claimed on the income tax return of an employee, a former employee or a retired employee who paid a contribution (or premium) to a private health services plan (group insurance plan) to cover, for example, medical or dental costs.

To indicate on an employee's RL-1 slip (RL-1) the amounts that he or she paid to such a plan, enter 235 in one of the blank boxes in the centre of the slip, followed by the amount or, in the empty space in the centre of the slip, write "Premium paid to a private health services plan" (or "Prime versée à un régime privé d'assurance maladie"), followed by the amount. This entry is optional.However, if you do not provide this information on the RL-1 slip, an employee may ask you for supporting documents. Do not include this amount in box A.

Revenu Québec - Rates, Thresholds and Amounts for 2012 Source Deductions and Contributions - Tax News - Information Centre

Revenu Québec - Rates, Thresholds and Amounts for 2012 Source Deductions and Contributions - Tax News - Information Centre

November 9, 2011

Rates, Thresholds and Amounts for 2012 Source Deductions and Contributions

Below are the rates, thresholds and amounts applicable for 2012 source deductions and contributions.

Indexation for 2012

Every year, the personal income tax system is automatically indexed. The indexation factor for 2012 is 2.66%.

Income thresholds and income tax brackets

For 2012, the income tax rates applicable to the three income tax brackets remain at 16%, 20% and 24% and the thresholds for the three income tax brackets have been indexed as follows:

• The 16% rate applies to taxable income of $40,100 or less. (The threshold was previously $39,060.)
• The 20% rate applies to taxable income of more than $40,100 but not more than $80,200. (The threshold was previously $78,120.)
• The 24% rate applies to taxable income of more than $80,200.

Source deductions return (form TP-1015.3-V)

The Source Deductions Return (form TP-1015.3-V) has been amended to take into account the new tax credit for workers 65 or older. In addition, the amounts on form TP-1015.3-V have been indexed.

Amount for workers 65 or older

A new tax credit for workers 65 or older will gradually be introduced beginning January 1, 2012. This new tax credit is designed to eliminate the income tax that such workers would normally have to pay on a portion of their eligible work income that is in excess of $5,000. The primary work income targeted by the measure is employment income.
If an employee 65 or older expects to earn more than $5,000 in eligible work income during the year, he or she may ask you to reduce applicable source deductions by completing form TP-1015.3-V.

If you use Table TP-1015.TI-V

If you use Table TP-1015.TI-V to calculate source deductions, you are not required to make any adjustments since the amount of this tax credit is included in the amounts used to establish the deduction codes in Table TP-1015.TI-V. As of 2012, these codes will take into account the tax credit for workers 65 or older.

If you use the formulas

If you calculate source deductions using the formulas in the guide Formulas to Calculate Source Deductions and Contributions (TP-1015.F-V), changes have been made to take the new tax credit into account. For more information on the changes, see Part 2 of the guide.

Indexation of the amounts in form TP-1015.3-V

Amounts for calculating income tax withholdings

	2012	2011
Basic amount	$10,925	$10,640
Amount transferred from one spouse to the other	$10,925	$10,640
Amount for other dependents who are 18 or over	$2,930	$2,855
Amount for a child under 18 enrolled in post-secondary studies	$2,015	$1,965
Additional amount for a person living alone (single-parent family)	$1,585	$1,545
Amount for a severe and prolonged impairment in mental or physical functions	$2,485	$2,420
Amount for a person living alone	$1,280	$1,245
Age amount	$2,350	$2,290
Amount for retirement income	$2,090	$2,035
Reduction threshold used to calculate net family income (This income is used to calculate the age amount, the amount for a person living alone and the amount for retirement income.)	$31,695	$30,875

Bonuses and retroactive pay

The threshold that determines the method to be used to calculate the income tax withholding from bonuses and retroactive pay has been increased from $13,300 to $13,700 for 2012.

Maximum deduction for employment income

The maximum deduction for employment income has been increased from $1,045 to $1,075 for 2012.

If you are using Table TP-1015.TI-V

The table takes into account the increase in the deduction in calculating the remuneration subject to source deductions of income tax.

If you are using the formulas

If you are using the formulas in the guide Formulas to Calculate Source Deductions and Contributions (TP-1015.F-V) to calculate source deductions, changes have been made to take into account the increase in the maximum deduction for employment income.

Amount paid to an emergency services volunteer

The tax-exempt amount of financial compensation paid to an emergency services volunteer has been increased from $1,045 to $1,075 for 2012.

Maximum pensionable earnings and contribution rate (QPP)

The QPP contribution rate has been increased from 9.9% to 10.05% for 2012, which corresponds to a contribution rate of 5.025% for the employee and 5.025% for the employer. In addition, the maximum pensionable earnings for the purposes of the QPP have been increased from $48,300 to $50,100. The maximum annual contribution to be withheld for any employee has therefore been increased from $2,217.60 to $2,341.65.

Maximum insurable earnings and premium rate (QPIP)

The maximum insurable earnings subject to QPIP premiums have been increased from $64,000 to $66,000 for 2012. Also, the employee premium rate has been increased from 0.537% to 0.559%, and the employer premium rate has been increased from 0.752% to 0.782%. As a result, the maximum employee premium is $368.94 (instead of $343.68) and that of the employer is $516.12 (instead of $481.28).

Maximum remuneration subject to the contribution to the financing of the CNT

The portion of the remuneration that exceeded $66,000 (instead of $64,000) is not subject to the contribution to the financing of the CNT for 2012.

Triple dip ahead for U.S. home prices

The U.S. home market will hit another low by next year, dropping even further below its 2006 peak, according to Fiserv, a financial analytics company.

Fiserv said home values will fall 3.6% by next June in the U.S., which will be a new low from the 2006 peak, down 35% from that point.

CNN Money reports the company’s 2012 prediction might not even be the eventual bottom, due to the massive shadow inventory of foreclosures that has yet to even be released.

Some U.S. cities popular with Canadians are among those expected to be hardest hit with price decreases next year. Naples, Fla., for example, will see prices drop another 18.9% by next June, according to Fiserv. That’s the largest decrease in price of any metro area covered.

Las Vegas wasn’t far behind, expected to see prices fall 15.9%, followed by Riverside, Calif., predicted to fall another 14.8%, and Miami was projected with a 14.8% drop, according to CNN.

But other cities, already hard hit in years past, will see some kind of recovery by next year in prices. Oscala, Fla., for example, will see prices gain 22.4% for the 12 months ending June 30, 2012. CNN said Oscala had already seen home prices drop about 50% previously.

Similarly, other previously suffering markets will gain next year, like Napa, Calif., projected to rise 20.9% next year, and Panama City, Fla., expected to gain 18.2%.

QST Harmonization Recently, the governments of Canada and Quebec announced the signing of a memorandum of agreement (MOA) to harmonize the Quebec sales tax (QST) and the federal goods and services tax (GST) effective January 1, 2013. The impact of harmonization and some of the transitional issues are expected to be different from those associated with the HST in Ontario. (As a result of last summer's referendum, British Columbia is expected to revert to its PST on April 1, 2013.) As of January 1, 2012, the rate under the current QST regime will be 9.5 percent, applied to the selling price plus GST. Effective January 1, 2013, the rate of the new "amended QST" will be 9.975 percent applied to the selling price excluding GST. The change is approximately revenue-neutral. The QST is already partially harmonized and it is expected that the tax base of the amended QST and the GST will continue to be largely the same, although financial services will become exempt and the current QST exemptions (for example, the exemption for books and for infants' diapers) will be maintained. Interestingly, Quebec will retain its separate legislation (An Act Respecting the Québec Sales Tax) and, as a result, will administer the amended QST rather than an HST levied under the federal Excise Tax Act (as is the case in the other harmonized provinces). Revenu Québec (not the CRA) will continue to administer both the GST and the amended QST; therefore, businesses will be required to prepare separate returns under the amended QST and will be subject to audits by Revenu Québec. Financial services are currently zero-rated for QST purposes, whereas the GST/HST system treats such services as exempt. As part of harmonization, financial services will become exempt. Although there will be no impact on consumers purchasing financial services (since zero-rated services are taxed at 0 percent), financial institutions will no longer be able to claim input tax refunds (ITRs), the Quebec equivalent of input tax credits, for the QST paid on their inputs relating to the supply of exempt financial services. However, the compensatory tax that was established to partly compensate for the ITRs that financial institutions were receiving will be eliminated over time. Overall, the financial services sector will experience a significant tax increase. Large businesses (those with taxable sales exceeding $10 million) will gain, in that they will eventually be able to claim full ITRs on all inputs. Currently, the QST system allows ITRs for most inputs but not for certain goods and services (for example, specified road vehicles, energy, telecommunications, and meals and entertainment) acquired by large businesses. As a result of the harmonization, ITRs for the QST paid by large businesses on all inputs will be allowed gradually over a period of three years, beginning in 2018. One interesting question is the extent to which the requirements for the amended QST can apply to non-residents, given that the requirements are under provincial legislation. Under section 92 of the Constitution Act, 1867, the provinces' legislative authority is limited to direct taxation "within the province" and to property and civil rights "in the province." In contrast, the provincial component of the HST and the collection requirements are imposed under federal legislation, and so are not similarly restricted. Draft legislation, transitional measures, and additional details are expected to be announced by June 1, 2012. Jung Ah Kwon, Michael Tsao, and Simon Thang KPMG LLP, Toronto jkwon1@kpmg.ca, mtsao@kpmg.ca, and sthang@kpmg.ca

Canadian Tax Focus Volume 1, Number 3, November 2011 ©2011, Canadian Tax Foundation

Disclosure of Information About Registered Charities Subsections 149.1(15) and 241(3.2) allow the CRA to publicly disclose information about registered charities. This exception to the general confidentiality rules is intended to reassure the public that donated funds are not misused and to allow people to research a charity before making a donation. My own inquiries about a small sample of charities show that there is room for improvement in the CRA's administration of the rules. Together, the two subsections allow for the disclosure of information such as the charity's name, location, registration number, date of registration, governing documents, application for registration, directors, financial statements, and notification of registration. Other permitted disclosures include any letter or notice that is a revocation of registration or that relates to a suspension or the imposition of a tax or penalty. Guidance CG-008 ("Confidentiality--Public Information"), dated August 15, 2011, contains a complete listing of permitted disclosures. Although both the Act and the guidance say that the CRA "may" disclose this information, a CRA official has confirmed that all of this information will be disclosed. Most of the information is readily available on the CRA's Charities website (www.cra-arc.gc.ca/charities). However, some information is lacking for many charities, including financial statements, governing documents, and documentation regarding disciplinary actions taken by the CRA. To determine the ease or difficulty of obtaining this additional information, I telephoned the Charities Directorate on several occasions to ask for specific information about a group of charities. Four of the charities were in good standing, and several others had received some form of sanction. The agents who assisted me with my requests for disclosure clearly made their best efforts to be helpful. Still, I experienced several difficulties: The CRA turned down my request for "all publicly accessible information." It appears that the onus is on the requester to have an in-depth knowledge of what information can legally be disclosed and then to request each item separately. I received the requested material over a three-month period. Some of the delays apparently were caused by the fact that information is stored offsite from the offices of the Charities Directorate. In addition, e-mail delivery is not an option; material can be faxed, but this method is subject to page limits, so postal mail is the most common delivery method. Four months after my original request, an agent called to say that the information that remained outstanding could not be located and the file was being closed. About 20 percent of the information that I requested was never received. Although the Charities Directorate deserves to be complimented for the generally high quality of its website, the CRA's procedures for supplying information not on the site are neither expeditious nor user-friendly. Perhaps the CRA is doing all it can in an era of budgetary restraint. Disseminating documents such as financial statements and disciplinary communications through a website is certainly not as easy as disseminating the contents of the charities' T3010 returns. David D'Onofrio PowerOne Capital Markets Limited, Toronto ddonofrio@poweronecapital.com Canadian Tax Focus Volume 1, Number 3, November 2011 ©2011, Canadian Tax Foundation

Prescribed Information To Support ITCs

An ITC claim must be supported by information prescribed in subsection 164(4) of the Excise Tax Act and in the Input Tax Credit Information (GST/HST) Regulations. The TCC in Les Pro-Poseurs Inc. (2011 TCC 113) recently considered whether invoices provided by the taxpayer to support its ITCs met the information requirements. The decision reconfirms that the ETA's and the regulations' information requirements are mandatory, not directory, and that compliance is compulsory if one wishes to claim ITCs.
In Les Pro-Poseurs, the appellant was a construction contractor that subcontracted out its work overflow. For the relevant period, the CRA rejected the appellant's claims for ITCs related to supplies of property and services purportedly acquired from a number of "dubious" suppliers (the subcontractors). The appellant appealed to the TCC.
The minister submitted that the invoices provided by the appellant to support its ITCs failed to meet the information requirements because they did not contain sufficient information to allow identification of the alleged supplies and determination of the ITC amount. The minister found that the subcontractors did not have staff or equipment to make the alleged supplies, some of them were untraceable, and some were in default to Revenu Québec with respect to several tax statutes. On the basis of those findings, the minister further submitted that the invoices were false because the subcontractors could not have provided the supplies to the appellant. Furthermore, because the subcontractors cashed most of their cheques from the appellant at cheque-cashing businesses, which charged an "astronomical commission," the minister suggested that the invoices in question were invoices "of convenience," having been prepared merely in order to allow the appellant to inappropriately claim ITCs.
At the TCC, the appellant submitted that the minister erred in concluding that the invoices were fictitious on the basis of his profile of the subcontractors and that, on the evidence, the appellant had established a prima facie case that the subcontractors actually provided it with the supplies. Although some of the prescribed information did not appear on the invoices, the appellant said that those strict requirements should not be imposed because most of the construction workers involved did not have "a gift for writing" and that the supporting documents met the industry standard.
The main issue before the TCC was whether the appellant was entitled to the ITCs claimed. The court first considered whether the appellant actually acquired the supplies from the subcontractors; it drew a negative inference from the fact that the appellant did not call witnesses (such as the subcontractors' officers and employees) who could have testified in support of the appellant's position. In determining whether the appellant's evidence made out a prima facie case that demolished the minister's assumptions in making the assessment, the TCC concluded that the testimony of the appellant's witnesses was either deficient or not credible in establishing that the subcontractors actually made the supplies to the appellant.
The TCC then considered whether the invoices provided by the subcontractors met the information requirements. The court concurred with its earlier views in Key Property Management Corporation (2004 TCC 210) and Davis (2004 TCC 662) to the effect that the legislative and regulatory requirements were mandatory and must be strictly enforced: the whole purpose of the provisions was (as stated in Key Property) "to protect the consolidated revenue fund against both fraudulent and innocent incursions." The court said that the invoices provided by the subcontractors did not meet the information requirements because they did not contain the information necessary to allow the minister to identify the work carried out by the subcontractors. Because the evidence weighed against the appellant, the TCC concluded that the appellant could not claim the ITCs related to those invoices issued by the subcontractors.
The courts have set a very high bar for anyone attempting to get around the mandatory information requirements for ITC claiMs. The TCC in Pro-Poseurs stressed that "[i]t is for the Court and not the industry to determine what the legislator means by 'description of each supply sufficient to identify it.'" The decision is a red flag for all businesses: to perfect an ITC claim, the best prescription is to ensure that each invoice issued by a supplier contains all the prescribed information.
Robert G. Kreklewetz and Jenny Siu
Millar Kreklewetz LLP, Toronto

US Tax Collection in Canada

How far the US tax authorities' reach extends into Canada in respect of US tax liability and penalty collection depends on the status of the debtor and the nature of the debt or penalty. The following discussion relates to the collection of taxes and associated interest, foreign bank account report (FBAR) penalties, fraud penalties, penalties for failure to pay, and accuracy-related penalties, all of which obligations are imposed under the Internal Revenue Code, except for FBAR penalties, which are imposed by the Bank Secrecy Act.
The general common-law position in respect of collection of foreign tax debts is set out in United States of America v. Harden ([1963] SCR 366). The US government attempted to collect a tax debt by registering the debt as a civil debt in a Canadian court. The court concluded that by attempting to collect taxes in this manner, the United States was attempting to enforce its revenue laws in Canada, a violation of the longstanding rule that a sovereign state will not collect taxes for the benefit of a foreign state. Quoting Peter Buchanan Ld. & Machaig v. McVey, the SCC adopted the reasoning of the High Court of Ireland that "in no circumstances will the courts directly or indirectly enforce the revenue laws of another country." The court said that "[n]o court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper." There is no distinction between the underlying claim and the collection of that claim.
That common-law position of non-enforcement is altered by article XXVI A of the Canada-US treaty, which establishes authority for assistance in the collection of tax debts. This assistance is provided in respect of "revenue claims": "all categories of taxes collected" "together with interest, costs, additions to such taxes and civil penalties" and "contributions to social security and employment insurance premiums levied by or on behalf of" the US government, which includes taxes and penalties imposed under the Code. The CRA treats US taxes and penalties that fall within this description in the same way that it treats domestic debts and uses its collection tools to recover the money. Thus, US tax owing, and interest and penalties ancillary thereto, is collectible under those treaty provisions. However, the treaty contains an important exception: assistance is not provided if the individual is a Canadian citizen.
In contrast, FBAR penalties are assessed for failure to report, and they are not connected to an underlying tax debt or to any penalty under the Code. The specific enumeration of social security and employment insurance contributions in the definition of revenue claim in article XXVI A(9) makes it clear that the treaty drafters turned their minds to other types of government debts that do not fit within the general description of "all categories of taxes collected." Thus, FBAR penalties are not collectible under article XXVI A because they are not income or capital taxes or taxes imposed under the Code or related penalties. There is still potential for the competent authorities to agree to extend the meaning of "tax" to include FBAR penalties in accordance with article XXVI A(11).
The United States may pursue recourse in Canadian courts regarding the collection of FBAR penalties. With respect to a foreign penal debt, the rule is clear: Canadian courts will not enforce it (Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52). The underpinning rationale is that foreign law conflicts with and encroaches on domestic law and thus the sovereignty of the domestic state. "Penal law" is defined in United States of America v. Ivey (1995 CanLII 7241 (ONSC), aff'd. 1996 CanLII 991 (ONCA)) as "all suits in favour of the State for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue or other municipal laws, and . . . all judgments for such penalties." FBAR penalties should not be enforced because they appear prima facie to fall within that description: they serve to punish a US citizen or green-card holder for his or her failure to report to the US government. Furthermore, FBAR penalties are not compensatory and do not affect the disgorgement of profits. (See Ivey; United States Securities and Exchange Commission v. Cosby, 2000 BCSC 338; and United States of America ( SEC ) v. Shull, 1999 CanLII 6625 (BCSC).
Harden makes it clear that taxes cannot be collected pursuant to registration of a civil judgment in a reciprocal jurisdiction. Although FBAR penalties are not taxes, it is highly likely that they are penal and thus are not enforceable in Canada. However, some uncertainty exists, and it may be possible to collect FBAR penalties in Canada on the principle of comity, discussed in Morguard Investments Ltd. v. De Savoye ([1990] 3 SCR 1077): a foreign judgment for a debt may be enforced in Canada if the party brings a separate action in a Canadian court.
In summary, a Canadian citizen need have little concern about the collection of US tax, interest, and ancillary penalties. However, a US taxpayer who is a Canadian resident and not a Canadian citizen and who owes US tax, interest, and penalties may face collection thereof by the CRA pursuant to treaty article XXVI A. It is extremely unlikely that Canadian citizens or residents will have to face collection of FBAR penalties, except in the very unlikely event that those penalties may be characterized as registrable civil judgments.
Erin L. Frew and S. Natasha Reid
Thorsteinssons LLP, Vancouver

Obligations of US Green-Card Holders and Citizens

For at least the last few decades, Canadians emigrating to the United States have had to consider the fairly onerous obligations that attach to the holder of a green card or of US citizenship. A Canadian who moved to the United States for business reasons may have been advised to get a work visa instead of applying for permanent residence; a US parent living in Canada may have been advised not to rush US citizenship for a child born a Canadian citizen, and, if the child was deemed to be a US citizen, to have that child renounce citizenship or expatriate at age 18. More recently, US citizens resident in Canada may have been advised to relinquish their US citizenship if their net worth and US tax were below the thresholds for the expatriation rules. Obtaining a green card or US citizenship is attractive because it allows the holder to live and work in the United States, but each brings a lifetime of weighty US tax responsibilities.

• A US citizen must always file a US form 1040 tax return regardless of where he resides and, subject to some minor relief (the foreign earned income exemption of about US$90,000), must pay US tax on worldwide income computed under US rules. Effectively, these rules mean that a US taxpayer living in Canada pays tax at the higher of the two rates--US and Canadian--on all income and cannot benefit from tax incentives in the other country. For example, a US citizen resident in Canada cannot benefit on his or her US tax return from the deduction for an RRSP contribution or the 100 percent deduction for Canadian exploration expenses, because the US tax is effectively increased to the extent that foreign tax credits for Canadian tax have been reduced. Similarly, although Canada has a principal-residence exemption, any gain exceeding US$250,000 on the sale of a Canadian house is taxable in the United States to a person obliged to file a US return for worldwide income.
  
• US gift tax may restrict estate freezing, asset protection, and gifting to spouses and children. The traditional Canadian corporate estate freeze attracts US gift tax; elementary asset protection such as having the family home in the name of the non-US citizen is difficult to accomplish, given the gift tax parameters; and the permitted annual gift is US$13,000 to each child and US$134,000 to a non-US-citizen spouse. Gifts of US$100,000 or more received from non-residents must be reported by the donee.
  The US estate tax and gift tax of up to 35 percent for estates over US$5 million may impair or preclude the transfer of wealth to the next generation.
  
• Annual reporting requirements apply to settlors and beneficiaries of foreign trusts. Non-reporting may trigger penalties of 35 percent of the value of property transferred to a trust, 35 percent of distributions therefrom, and 5 percent a month for gifts from non-US persons. Reporting is also required of foreign grantor trusts.
  
• Controlled foreign corporation rules require that tax be paid on subpart F (passive) income regardless of whether that income is distributed. These rules may apply to a US-citizen Canadian resident who forms a Canadian holdco to own investments.
  
• Passive foreign investment company (PFIC) rules require the taxation of undistributed passive income and gains in foreign (non-US) companies not controlled by US shareholders. To be a PFIC, a foreign corporation must have passive income of at least 75 percent of its gross income, or 50 percent or more of its assets must generate passive income. Recent amendments require annual reporting by PFICs regardless of whether distributions are made. A US$10,000 non-filing penalty is imposed.
  
• A foreign bank account report (FBAR) must be filed on pain of onerous penalties for non-compliance: if non-filing is wilful, 50 percent of the account balance computed annually may be forfeited, and criminal sanctions may also be imposed. Multiple years of non-reporting may result in penalties that exceed the cash in the account. Financial interests in or signing authority over bank accounts, securities accounts, and other financial accounts in foreign countries must be reported annually.
  
• Disclosure requirements are part of the tax return for specified foreign financial assets with an aggregate value over US$50,000 and require reporting--separate from the FBAR rules--of depository accounts, financial accounts, stocks and securities issued by a non-US person, and an interest in a foreign entity. The minimum non-compliance penalty is US$10,000; a 40 percent additional penalty is imposed for undisclosed or undervalued foreign financial assets.
  
• Expatriation rules (departure tax) apply if the US citizen or green-card holder decides to renounce his or her green card or US citizenship. Some US reporting is required for 10 years after expatriation if the person's assets exceed US$2 million and annual taxes exceed a threshold. If an individual makes a gift in the 10 years following his or her expatriation, the recipient may be subject to gift or estate tax.
  
• Effective in 2014, a US citizen who wishes to open a foreign bank account or an investment account will experience increased difficulties as a result of FATCA (the Foreign Account Tax Compliance Act). FATCA can result in a 30 percent withholding on payments made to a foreign financial institution that does not enter into an IRS disclosure agreement that requires it to identify US accounts and report them to the IRS annually. The bank must inquire about the account holder's citizenship and place of birth. In consequence, many foreign banks are refusing to deal with US citizens.
  
• Temporary but punitive voluntary disclosure rules apply and include a fixed penalty, taxes, and interest on previously undisclosed amounts.
  

Jack Bernstein
Aird & Berlis LLP, Toronto

August 2011: Monthly Indicator Recap

September 20, 2011 | Monthly Indicator Recaps, News Releases
Presented below are figures for the month ending August 31, 2011.
(Download to print PDF)

HOUSING INDICATORS*	DIRECTION	% CHANGE (vs. last month)	AUGUST LEVELS
Volume of MLS® Home Listings		-0.60%	71,985
Volume of MLS® Home Sales		-0.84%	37,177
Average MLS® Sale Price (Canada)		0.06%	$362,652
ECONOMIC INDICATORS**	DIRECTION	% CHANGE (vs. last month)	RATES
Unemployment Rate (August 2011)		0.10%	7.30%
GDP (June 2011)		0.20%	N/A
Retail Sales (June 2011)		0.70%	N/A
Consumer Price Index (July 2011)		2.70% (Year‐o‐year, July)	N/A
FINANCIAL INDICATORS	DIRECTION	% CHANGE (vs. last month)	RATES
Prime Rate**		0.00%	3.00%
5 Year Fixed Posted Mortgage Rate***		0.00%	5.39%

MLS® is a registered certification mark owned by The Canadian Real Estate Association.
*Seasonally adjusted month-to-month results; Source: The Canadian Real Estate Association
** Source: Statistics Canada
*** Source: RBC

Organisme d'autoréglementation du courtage immobilier du Québec - The mortgage broker

Organisme'>http://oaciq.com/courtierhypothecaire/en/">Organisme d'autoréglementation du courtage immobilier du Québec - The mortgage broker


Get more choice
The brokers shop and negociate for you mortgage offers with many financial institutions across Canada. They can thus get you the best plan for your needs, and with better conditions.

Why a mortgage broker
A broker will help you find a mortgage offer based on your needs.
Because of a proven experience, a broker can negotiate the best borrowing terms for you.
Since a broker is not obligated to any one lender, he can objectively recommend the mortgage loan that offers the best terms and rates for you out of all the products available on the market.
A broker will advise you at every step of the mortgage financing process and make sure everything goes smoothly.
A broker will free you to go about your work and personal business, with peace of mind.
Because of his tested expertise, a broker will save you time and money, and help you avoid unpleasant surprises.
A broker will help you find a mortgage offer based on your needs.
Because of his proven experience, a broker can negotiate the best borrowing terms for you.
A broker will free you to go about your work and personal business, with peace of mind.
A broker will advise you at every step of the mortgage financing process and make sure everything goes smoothly.
Since a broker is not obligated to any one lender, he can objectively recommend the mortgage loan that offers the best terms and rates for you out of all the products available on the market.
Because of his tested expertise, a broker will save you time and money, and help you avoid unpleasant surprises.
Because of the large volume of business he transacts with various financial institutions and the bargaining power he holds as a result, a broker can negotiate a substantial rate reduction for you.
If a new mortgage product that meets your needs comes on the market, a broker will make sure to include it in your options.
The excellent understanding that a broker has of the various types of products on the market enables him to recommend the most advantageous ones for you.
Once you have obtained your mortgage loan, a broker will continue to help you save by recommending special repayment terms or options to reduce your amortization period, so that you can repay your mortgage more quickly without overextending yourself.
A broker has the necessary training, experience and market knowledge to ensure the transaction is carried out properly and without surprises.
A broker will bring you peace of mind by ensuring that the transaction goes smoothly.
A broker has all the qualifications required to provide quality service.
A broker has an obligation to promote the interests and protect the rights of his client.
A broker has access to state-of-the-art tools.
A broker will help his client gather all the proper documentation required.
A broker has an obligation to verify all the information he communicates.
The brokerage contract creates a professional relationship between the broker and the client and officially documents the broker’s obligations towards his client.
Mortgage brokerage in Québec is overseen by the OACIQ.
The public is protected through the use of the many forms designed by the OACIQ to which a broker has access.
An entrance examination ensures consumers that the broker they deal with is qualified to provide them with the service they need.
A broker must attend the continuing education activities deemed mandatory by the OACIQ.
Access to the Info OACIQ Information Centre for information concerning your rights as a borrower, the Real Estate Brokerage Act and the organization’s activities, products and services.
Access to the OACIQ Assistance Service when help is needed.
Possibility of filing a request for investigation with the syndic.
The OACIQ Inspection Committee ensures that a broker’s work methods are consistent with the rules of the profession through the inspection of their records, books and registers.
The Real Estate Indemnity Fund compensates consumers who are victims of fraud, fraudulent tactics and misappropriation of funds.
The mandatory professional liability insurance for brokers provides consumers with additional financial protection in case of fault, error, negligence or omission.

Bank of Canada is maintaining the overnight rate at 1%

The Bank of Canada today announced that it is going to maintain the overnight
rate at 1%. "Largely due to temporary factors, Canadian economic growth stalled
in the second quarter. The Bank continues to expect that growth will resume in
the second half of this year, led by business investment and household
expenditures, although lower wealth and incomes will likely moderate the pace
of investment and consumption growth".
How did this affect our GIC rates?
Generally the GIC rates have been steady over the last few months with this
announcement having very little impact.


The next scheduled announcement is October 25, 2011.
For the full announcement, visit www.bankofcanada.ca.

Are diets tax deductible?

Tax and Estate Planning

Are diets tax deductible?

By Jamie Golombek
In certain cases, it’s possible to write off the bills for getting in shape
Put on some extra weight over the long winter and rainy spring? Would you like to take it off this summer? Well, you may be able to get some tax relief to help you shed those pounds, depending on the approach you take.
The general rule is that medical expenses you incur for yourself, your spouse or partner or your minor kids are eligible for a non-refundable credit provided they are listed as an "eligible" medical expense under the Income Tax Act. Medical equipment must be prescribed by a medical practitioner.
Last week, the Canada Revenue Agency was asked specifically about whether fees for a weight loss program, the cost of exercise equipment and the cost of a gym membership, all of which were incurred for the treatment of obesity, would qualify as medical expenses for purposes of the medical expense tax credit (METC).
Under the Tax Act, for an amount to qualify, it must be paid to a "medical practitioner in respect of medical services."
A "medical service" is defined as "a service relating to the diagnosis, treatment or prevention of disease performed by a medical practitioner acting within the scope of his or her professional training." Diagnostic procedures or services must be either for maintaining health, preventing disease or assisting in the diagnosis or treatment of any injury, illness or disability.
The CRA concluded that fees paid for a weight-loss program for the treatment of obesity would indeed qualify for the METC, provided the program was for therapeutic or rehabilitative purposes and was provided by a provincially licensed medical practitioner.
As for the gym membership, the CRA concluded that since such membership "would not normally have a diagnostic purpose," it would not qualify as a medical expense.
Finally, the CRA said the exercise equipment could only qualify if it was prescribed by a medical practitioner and specifically listed in the Income Tax Regulations, which would generally not be the case for exercise equipment.
Parents looking to keep their kids active during the summer months are reminded of the children's fitness tax credit which allows you to claim up to $500 of registration fees per child under the age 16 for participating in various fitness activities towards this non-refundable credit.
Dr. Barbara von Tigerstrom, a law professor at the University of Saskatchewan, just published a report titled "Using the Tax System to Promote Physical Activity: Critical Analysis of Canadian Initiatives" in the latest issue of the American Journal of Public Health.
In her report, Dr. von Tigerstrom critically assesses both the potential benefits and limitations of using tax measures, and in particular, the children's fitness tax credit, to promote physical activity. She concludes that "careful design could make these measures more effective, but any tax-based measures have inherent limitations, and the costs of such programs are substantial. Therefore, it is important to consider whether public funds are better spent on other strategies."
Jamie Golombek is Managing Director of Tax and Estate Planning, CIBC Private Wealth Management.

How vulnerable are Canadian housing prices?

Economic Outlook

How vulnerable are Canadian housing prices?

By Benjamin Tal
Digging deeper into housing numbers reveals an adjustment of prices is more likely than a crash
So is it a bubble? Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable. Tempting, but probably wrong. When it comes to the Canadian real estate market at this stage of the cycle, any statement based on average numbers can be hugely misleading. The truth is buried in the details — and there the picture is still not pretty, but much less alarming.
House Prices — Beware of the Average
The average house price is still rising by 8.6% on a year-over-year basis. However, take Vancouver out of the picture and this rate slows to 5.6%. Exclude both Vancouver and Toronto and the price increase is only 3.7%.
Zooming in on the high profile Vancouver market, we see that the gap between average and median prices is approaching an all-time high—indicating a highly skewed market. In fact, removing properties that are above the $1 million mark reveals a much more moderate price appreciation and reduces the average sale price by $220,000 to just over $590,000. So what makes Vancouver abnormal is the high end of its property market.

Looking beyond the average price numbers reveals a highly segmented and multi-dimensional market that is probably influenced by different forces. But even a multi-dimensional market can overshoot — and the likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation.
Given that, the housing market will eventually correct. The only question is what will be the mechanism of that correction. A crash is, of course, the shortest route to equilibrium. But for such a scenario to materialize we need two pre-conditions: 1) a significant and quick rise in interest rates akin to the one that led to the 1991 recession and housing market correction, and/or 2) a high-risk mortgage market that is highly sensitive to any changes in economic realities, including hikes in interest rates.
Pre-conditions for a Crash in the Canadian Context
In Canada, a sharp and brisk tightening cycle is unlikely. The market expects a gradual increase in short-term rates in the coming years. The rising number of mortgage holders that carry a variable rate mortgage will be the first to feel the pain, but if history is any guide, they will return quickly to the comfort of a five-year fixed rate the minute the Bank of Canada starts hiking.
What about the risk profile of the Canadian mortgage space? We zoom in on two sub-segments of the mortgage market that traditionally accounted for most defaults: mortgage holders that carry a debt-service ratio of more than 40% and those with less than 20% equity on their house.
Just over 6% of households have a debt service ratio of more than 40%—a number that has risen by a full percentage point since 2008. Note, however, that this ratio is still well below the ratio seen in 2003, when the effective interest rate on debt was more than a full percentage point higher, and no correction in house prices ensued. All other things being equal, even a 300-basis-point rate hike by the Bank of Canada would take this ratio to only just over 8%.
Moving on to the equity position, roughly 20% of the Canadian residential real estate pool is in properties with less than a 20% equity position. Note that this number has been relatively stable over the past few years, and Vancouver and Toronto lead the way.
Digging deeper and looking at the households with both low equity positions and high debt-service ratios, we found that this fragile segment of the market accounts for only 3.2% of total mortgages. Shock the system with a 300-basis-point rate hike and that number would rise to a still-tempered 4.5%. Historically, even in that group, the default rate has been well below 1%. Thus, short of a huge macro shock, there does not appear to be the risk of large scale forced selling that would typically be the trigger for a precipitous plunge in the national average house price.
As a result, while house prices are likely to adjust as interest rates eventually climb, the national pace of any correction is likely to be gradual. That could still entail a period in which housing underperforms other assets as an investment class, until rising incomes and a tame price trajectory brings the market back to equilibrium.

Benjamin Tal is deputy chief economist at CIBC

Good planning or good luck? Why Canada's housing market didn't crash

First National - You're Home - Spring/Summer 2011 - Market Trends

	Market Trends

Good planning or good luck?
Why Canada's housing market
didn't crash

It’s been four years since the housing market crashed in the United States. Why did they suffer through such a painful housing bubble and bust, while Canada did not? Was it good planning or good luck that made the Canadian housing market so resilient?

As it turns out, it was the differences in the structure of the Canadian financial sector and specifically, the mortgage market, which helped put Canada in the admirable position it enjoys today.

Some key factors that make the Canadian mortgage market different:

No NINJA mortgages
Before the meltdown, Americans could apply for a mortgage without the lender verifying their income or job status. These mortgages became known as NINJA mortgages meaning “no income no job no assets”. This poor lending practice, along with sub-prime lending, has been widely considered the leading cause of the devastation to the U.S. housing market. This kind of unregulated lending is not available in Canada.

No teaser contracts and low rates
Canadian lenders don’t offer adjustable rate mortgages with teaser contracts of low or zero interest introductory rates. When these teaser-rate mortgages suddenly reset at much higher rates they become shockingly unaffordable for homeowners.

More conservative options
Canadians tend to have less debt than Americans and choose more conservative mortgage options.

Mortgage interest is not deductible
In the U.S., homeowners can deduct mortgage interest against their taxes. In Canada, this is generally not the case. As a result, in the U.S. it is more tempting to leverage your home and borrow against it. In essence, they’re using their homes as an ATM machine, making them more vulnerable when market values decline.

Nationwide banking system
The U.S. has a fragmented unit banking system. Canada has always had a nationwide banking and branching approach, which has created a safer and sounder system. For the third consecutive year, the World Economic Forum has ranked Canada’s banking system as the soundest in the world and a recent Bloomberg report on the world’s strongest banks shows Canada with five banks in the top 20 – National Bank being number one in North America and CIBC number four. Canada was one of the few countries that did not experience bank failures in the recent global crisis and no Canadian financial institution required a bailout.

In summary, it was a combination of these factors and others that helped prevent the Canadian housing marketing from crashing. Looking to the future, as Canadians we should feel confident that the strength and stability of the Canadian banking system, along with prudent lending practices, will continue to protect the economy and the value of our homes.

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