With new information coming out of the recently released Canadian federal budget, we are sharing our newsletter a week earlier to provide you with the most timely insights we can.
In this week's economic update, we are discussing the recent relative subsiding of bond and equity market volatility - a welcome trend for many investors and market watchers. We unpack how the response from the US Federal Reserve appears to have contained the turmoil from previous weeks, but that credit and lending may become more of a news topic over time.
With the release of the federal budget last week, our in-house wealth planning expert Elvis Henrique highlights some of the most relevant and impactful parts of the proposed budget and what that could mean for you.
Lastly, we are highlighting our upcoming Inspirational Women event on May 16th. Hosted and Cutten Fields in Guelph and presented in partnership with the Guelph Chamber of Commerce, this luncheon will feature Jessica Hirst and Donna Hirst of The Modern Bride. We have provided a link to register for this great event!
Economic Update
The past few weeks have come as a relief to investors as bond and equity market volatility has subsided to some extent. Positively, the recent turmoil witnessed in the banking sector appears to have been contained. That should leave investors feeling more confident around the stability of the banking system. Nevertheless, credit challenges still lie ahead as they often do through economic cycles.
US Federal Reserve response appears successful
The measures taken by the U.S. Federal Reserve a few weeks ago in response to signs of stress facing some of the U.S. regional banks have proven successful so far. More specifically, the central bank created a liquidity facility that allows commercial banks to exchange eligible securities (valued at par) for up to one year in exchange for U.S. dollars. This addressed one of the key challenges that some regional banks were dealing with as they were having to sell investments at a loss to meet client withdrawals. The facility has seen meaningful use to date. Encouragingly however, the total amount of funds U.S. banks have had to borrow from all of the Fed’s facilities has recently declined, suggesting deposit outflows from banks may be steadying. Overall, signs of stability have helped equity markets recover.
US credit situation remains a focus moving forward
We still believe investor caution is warranted as we see credit clouds on the horizon. The U.S. banking industry can be broken into two categories: the large national franchises that more closely resemble the Canadian banks, and the regional banks that have a relatively smaller footprint.
The latter group is now much more likely to focus on liquidity, loan quality, and capital going forward given the recent stress they have endured. As a result, they may become strict with respect to their lending practices. That is particularly important because they have an outsized influence on the U.S. economy despite the fact they are smaller and more regionally focused. For example, the regional banks account for about half of all commercial, industrial, and consumer loans in the country. More striking, they account for a disproportionately large share (around 80%) of U.S. commercial real estate loans.
US commercial real estate may be facing headwinds
Commercial real estate (a group that includes properties across industrial, lodging, health care, retail and office sectors, among others) may be a growing source of economic vulnerability. As with the Canadian residential real estate market, the U.S. commercial real estate market has a substantial amount of loans that need to be refinanced over the next few years at potentially much higher rates of interest.
The heavy dependence on regional banks that may be more reluctant to lend exacerbates this potential challenge. Moreover, some pockets of the commercial real estate market (like retail and office properties for example) continue to grapple with structural headwinds. Some of these forces are relatively new such as the pandemic-induced work from home policies that have created higher office vacancy rates. Other forces are longer standing such as online shopping that has pressured retail for years. Regardless, the combination of all of the above has created a challenging outlook for pockets of the commercial real estate market. These issues may inevitably bubble up to the surface over time.
Industry remains well capitalized in the face of potential volatility
A deteriorating credit backdrop is not uncommon by any means. As economic cycles come and go, so too do credit losses as some consumers and businesses inevitably have a harder time repaying their debts. The banks continue to prepare by setting aside capital to absorb future losses. Overall, the industry is well capitalized, both in Canada and the U.S. Nevertheless, any turn in the credit cycle is likely to be accompanied by the typical bouts of market volatility and weakness as investors try to gage the gravity of the situation. We remain confident in our portfolio management approach and its fit with our clients’ long-term wealth management objectives.
Federal budget highlights - with Elvis Henrique
On March 28th 2023, Deputy Prime Minister and Minister of Finance Chrystia Freeland released the federal budget against a backdrop of slowing global and Canadian economies, elevated interest rates and high inflation.
This budget reflects the environment of current economic uncertainty and at a high level, one of its key objectives is not to exacerbate inflation. However, there are some impacts or implications from the budget which may have a more direct impact on you. Below, Elvis Henrique (Elinesky Schuett Private Wealth’s in-house wealth planning expert) outlines some of the features of this year’s budget that may be important for you to be aware of.
No changes to personal, corporate, or capital gains tax rates.
This is a case of what’s not included in the budget as opposed to what is included. There was some expectation that personal and corporate tax rates, as well as capital gains inclusion rates, could increase. These rates remaining unchanged is great news for our clients.
Alternative Minimum Tax (AMT) changes may have an impact on high-income individuals
AMT is a parallel tax calculation that prevents high-income earners and trusts from paying little or no tax as a result of certain tax incentives, such as claiming certain tax deductions and credits. You pay the AMT or regular tax, whichever is highest. There are a number of changes the budget proposes, including an increase in the AMT tax rate from 15% to 20.5%, and an increase in the exemption amount from $40,000 to $173,000 for 2024. Changes to AMT inclusion rates for capital gains (including on donated securities), employee stock options, and non-refundable tax credits were also mentioned.
These changes may impact you if you are a business owner planning to sell, have stock options, invest in tax shelters such as flow through shares, or have plans to make significant donations.
If you have any questions about the specific changes to AMT details and rates, you can find more detail in this article by RBC Wealth Management, or by contacting our team directly.
RESP withdraw limit increased with in the first 13 weeks
You can now withdraw more funds in the first 13 weeks - $8,000 versus the previous $5,000 limit. Also, divorced or separated individuals can own a joint RESP.
Tightening of rules for intergenerational business transfers
Changes to Bill C-208 are tightening the rules and conditions that apply. Bill C-208 was put into place in 2021 to allow for a more tax advantaged way to sell your business to your children. However, the way the way the bill was written meant some were taking advantage of this bill and there was no actual transfer of a business to the next generation. The changes to Bill C-208 are being made to make sure that business owners are genuinely transferring their businesses to adult children. While this likely doesn’t impact many of our clients, it is important to be aware of the changes being proposed.
New rules for Employee Ownership Trusts (EOP)
While this might not have a direct impact on many of our business owner clients, the recent changes to the Employee Ownership Trust (EOP) rules make it easier for employees to purchase a business. This provides an additional option for business owners considering their succession planning.
More details
If you are interested in reading more detail about these proposed changes, or other details coming from the presented federal budget such as the Grocery Rebate, Canadian Dental Care Plan, and Canada’s clean economy tax credits, I would encourage to read this article from RBC Wealth Management: Federal budget 2023: Key measures that may have a direct impact on you.
Inspirational Women luncheon event
On May 16th, the Guelph Chamber of Commerce will be hosting the final Inspirational Women luncheon of the year, where they will be celebrating Jessica Hirst (Founder and CEO) and Donna Hirst (Co-owner and CFO) of The Modern Bride. We are proud to be the presenting sponsor for these luncheons.
Jessica and Donna will be interviewed by our own Jennifer Goody-Brown about their journey as CEO and CFO, and about building a successful business as a mother and daughter duo.
If you're interested in attending, you can use this link to register now: register here.
.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.