Missives & Marginalia
A (sometimes) regular compendium of my current thoughts on markets, the economy, and other random marginalia.
New Team Member
We’re thrilled to introduce Shauna Harrison as our new Associate Advisor. With over a decade of experience at RBC DS, Shauna has honed her skills in team leadership and generalist roles. She’s ready to bring her expertise in documentation, cash management, and client contact to our team. Shauna will be working closely with Jan on trade execution and supporting Natasa with clients' financial planning, ensuring smooth operations all around.
Shauna's journey to investment management started with a leap from pursuing a career in elementary education to exploring corporate services at a law firm. Inspired by family friend Linda McLaughlin's passion for her work at RBC DS, Shauna decided to make the switch—and she hasn’t looked back since! Over ten years later, she’s still being challenged and learning something new every day.
When not at work, you can usually find Shauna chasing after her 7-year-old son, Jackson, and her 2-year-old son, Easton. If she manages to find any spare time, she enjoys reading, doing puzzles, and watching horror movies. She also loves anything spooky and enjoys being outdoors and taking walks with her family.
We’re fortunate to have Shauna's wealth of experience on the team and can’t wait for you to meet her!
 | Shauna can be reached at: 204-982-2662 |
Navigating shifts and opportunities in the economy
April review and market trends
As we closed out April, global equity markets slightly dipped after gains seen since last October, wrestling with ongoing inflation and dimming hopes for U.S. interest rate cuts. However, May has shown better performance for global markets, largely fueled by U.S. data indicating a weaker pace of job growth and moderated inflation, rekindling hopes for potential interest rate cuts later this year.
Earnings and economic outlook
First quarter earnings have been stronger than expected, with U.S. companies showing nearly 5% year-over-year growth. While some executives report strong consumer demand and reshoring benefits, others cite challenges from higher interest rates and geopolitical tensions. Notably, the largest U.S. stocks, our “Magnificent Seven,” have outperformed expectations but saw little stock price movement due to high valuations and significant AI investments. We anticipate a slowdown in their earnings growth from the recent 30-40% to mid-teens by 2025. Yet, patience may be required as growth aligns with valuations.
Canadian housing and consumer stress
A significant challenge for many Canadian households is the rise in mortgage and rent costs. Since the Bank of Canada began hiking rates in 2022, mortgage interest costs have risen over 20% year-over-year. The Bank of Canada’s Financial Stability Report (FSR) indicates that mortgage costs have driven the average mortgage debt service ratio to over 20%. While households have managed this relatively well, those with mortgages from 2021-2022 may face more financial pressure upon renewal due to higher rates.
Renters in Canada are experiencing increased financial stress, with rent prices rising over 8% year-over-year, driven by higher home ownership costs, low vacancy rates, and high immigration. The FSR report also notes a rise in delinquencies on consumer debt among renters.
Looking ahead
On a positive note, the Bank of Canada may begin cutting interest rates this summer, providing relief to Canadian households and potentially slowing the rise in home ownership and rent costs. Longer-term, increasing the supply of housing is crucial to restoring balance between supply and demand.
We’re optimistic about broader earnings growth, which could introduce market volatility and shifts in leadership. However, our clients’ portfolios remain well-diversified, poised to perform well across different sectors. In these uncertain times, staying informed and strategically positioned is crucial. We’re here to navigate these shifts and ensure your investments are set for success.
| Read RBC Wealth Management's latest Global Insight Monthly for the latest thoughts on the markets and economies around the world. |  |
So...the only things certain aren't death and TAXES anymore...
It's human nature, of course, to get complacent when a regime has been in place for a while. I'm sure the accountants on this email list will probably strangle me, but tax rules in Canada have been reasonably consistent over the past few decades. There have been tweaks here and there (changes to the tax treatment of corporations comes to mind), but in broad strokes, it's been mainly around the margins. Not so this past couple of years. I was having meetings with a number of accountants we work with over the past month, and the common theme has been around whip-saw. Between the proposed--then reversed, tweaked, or delayed--changes to the AMT, bare trusts, charitable donations, and others, their lives have been...interesting.
And this recent budget hasn't made them more relaxing. The news has been taken over with talk of the capital gains inclusion rate changes. The new budget proposes to change the amount of capital gains included in income for tax purposes from the current 1/2 up to the proposed 2/3. Granted, the first $250,000 per year of gains in personal accounts is at the 1/2 rate, but all gains in corporations and trusts is taxed at 2/3. And the majority of our clients have either/and corporations, trusts, or capital gains greater than $250,000, so it's certainly pertinent and affects their planning going forward.
That being said, the sky isn't falling. There is also good news for tax payers in the budget
- The Lifetime Capital Gains Exemption has been raised to $1.25 million, and those capital gains might be taxed at a reduced 1/3 rate of inclusion up to $2 million under the new Canadian Entrepreneur's Exemption.
- For clients' kids and grandkids, the First Time Homebuyers' Plan has been increased to $60,000. Don't forget, as well, that the new First Home Savings Accounts are already available; a good number of our clients have already helped family members to take advantage of the tax savings there.
- For lower income and disadvantaged Canadians, the Canada Child Benefit has been tweaked, CPP disability benefits have been enhanced, and a new Canada Disability Benefit has been introduced to help low-income working-age persons with disabilities.
Federal Budget and Tax Articles
| Federal Budget 2024 RBC Family Office Services Canada’s 2024 Federal Budget brings a mix of changes that may affect individuals and businesses differently. With an increase in the capital gains inclusion rate and adjustments to the Home Buyers’ Plan, the financial implications are significant. RBC's full analysis offers a balanced perspective on what these developments could mean for you. Read More | |
| Planning considerations for medical professional corporations selling securities prior to June 25, 2024 RBC Family Office Services A business like ours attracts a number of medical professionals, especially ones with clinics and corporations. In light of the 2024 Federal Budget, medical professionals with corporations should consider the implications of the increased capital gains inclusion rate. Before June 25, 2024, evaluating the sale of securities could be crucial. Read More | |
| Planning considerations for your Canadian vacation property before June 25, 2024 RBC Family Office Services This is Manitoba. A good portion of our clients have family cottages with significant unrealized capital gains and are considering gifting them to their children. Understanding the proposed changes is essential to minimize taxes and ensure a smooth transfer of ownership. Read More | |
| Estate freeze planning Abby Kassar, Business Owner Specialist, RBC Family Office Services The LCGE is proposed to be raised to $1.25 million after June 25. For our business-owner clients, an estate freeze can minimize taxes and simplify ownership transitions. Freezing your business's value benefits the next generation and reduces your tax burden at death. Early planning, ideally two years before a sale, maximizes the lifetime capital gains exemption and optimizes dividend distribution to lower-income family members. Read More |
RBC Articles
| Will AI generate long-term equity performance Joseph Wu, CFA Artificial intelligence is transforming equity markets, driving significant stock gains. While AI offers vast growth potential across sectors, its long-term impact is uncertain, making it challenging to identify enduring winners. The market's response to AI can be unpredictable, so diversification is essential to mitigate risks and seize AI-driven opportunities. Read More | |
| It's hard to leave (higher rates) when you can't find the door (to lower inflation) Financial Markets Monthly The article examines the difficulties central banks face managing high inflation and fluctuating interest rates. It highlights the complexities of policy decisions in this volatile environment and the struggle to balance economic stability and growth without triggering negative market reactions. Read More | |
| Global Insight Weekly RBC Portfolio Advisory Group The article examines the difficulties central banks face managing high inflation and fluctuating interest rates. It highlights the complexities of policy decisions in this volatile environment and the struggle to balance economic stability and growth without triggering negative market reactions. Read More |
Markets and Society
| Renters so far more ‘vulnerable’ than homeowners amid higher interest rates. Why? The Bank of Canada reports that renters are becoming more vulnerable due to rising interest rates and high inflation, which are outpacing wage growth. This financial strain could worsen without economic improvement, highlighting the need for potential policy interventions. Read More | |
| Fair Markets for Me, Protectionism for Thee The host–founder of The Dispatch–interviews Cato Institute's Ryan Bourne about inflation cases and misconceptions, as well as policy failures and pitfalls seen around the world economy. Read More | |
| The next era of global superpower competition: a conversation with the New York Times' David Sanger Ian Bremer You can't get much smarter than Ian Bremmer, but you can come close with David Sanger, the national security correspondent for the New York Times. Their discussion revolves around the politics, intelligence, and policies around the US, China, and Russia. A must-listen. Read More |
Everything Else
| How philosophy plays a vital role in Canada's biggest ethical debates I was incredibly fortunate to take Ethics and Biomedicine from Dr. Schafer in 2004, just a year after the completion of the Human Genome Project. It was a fascinating time to be discussing the thorny questions facing the world, and one of the most stimulating classes I took. Hearing his voice again was a dream, and this is an enthralling conversation. Read More | |
| Why Gold? Why does gold captivate us? NPR's Planet Money–an excellent general-interest podcast for anyone–explores why we have pretty much always used gold instead of, say, silicon or platinum as a store of wealth through the ages. Read More | |
| How Should I Be Using A.I. Right Now? Ezra Klein Ezra Klein has been on the AI beat for a while, and on this very practical podcast he interviews Wharton School professor Ethan Mollick, another AI-as-a-utility booster about tip and advice on using AI in everyday life. Very interesting and a good starting point for people jumping into GenAI in their daily lives. Read More |