New Wealth Eroders Facing Canadians

As Canadians plan to take a break from tax for summer holidays, the key eroders of wealth – taxes, inflation and the costs of building wealth – are about to take a bigger bite out of Canadian’s balance sheets. There are three key reasons for this and it’s important to set up some time with tax and financial advisors before hitting the beach, to plan to stay ahead of tax issues and comply with two more filing deadlines as well.  

Over a million households are expected to renew their mortgages in 2023.  According to Statistics Canada,  the interest portion of mortgage payments was 70% higher in the first quarter of 2023 compared to the year before.   The Bank of Canada has estimated that by 2026 most taxpayers with mortgages will see increases in monthly payments of 20 to 40%.

Meanwhile, Canadians’ average debt to income ratio was 1.845% in the first quarter of 2023, which means that for every dollar of disposable income, households owe $1.85 in debt on consumer credit, mortgage and non-mortgage loans.  

This appears to be a multi-generational issue, as well.   According to a recent Globe and Mail survey, all generations are affected.  According to this synopsis even pensioners in the 70+ age cohort are not immune to mortgage debt.  The average mortgage debt is just under half a million dollars.

On a $500,000 mortgage, the interest payable will be about $372,400 at a 5% fixed income rate and a 25-year amortization period. That’s just over $2,900 a month.  That compares to $1,990 a month and $127,600 interest payable over 25 years. Where will that extra $1,000 a month come from?

Taxes are the second key wealth eroder, especially with the introduction of the new Underused Housing Tax (UHT) and the new UHT-2900 Return, which reports properties owned on December 31, 2022 which may be subject to the tax or a special exemption.  Normally that new return is filed on April 30, but this year there is an extended tax filing deadline:  October 31, 2023.  Failure to file this complicated form, even if just to opt out of paying the tax, will bring significant penalties.  Together with the new Alternative Minimum Tax for high income earners, these changes will impact the terminal value of real estate portfolios, and therefore family net worth.

Related to this wealth eroders is the danger of retroactive taxation, due to tax auditing, especially for business owners.  In fact, there is a worrisome trend in taxpayers’ relationships with the CRA, according to an April 2023 CFIB survey.  It revealed that

• 76% of pros have significant concerns about worsening service levels and intimidation tactics at the CRA. Two-thirds (66%) of business owners felt intimidated by the CRA,
• 51% felt as if they were treated like they did something wrong,
• nearly half (48%) felt that they were not being provided with the tax guidance their business needed and
• only 23% felt that the CRA is accountable for its mistakes or is making an effort to be small business friendly.

Income tax audit programs reported a combined fiscal impact of $9.6 billion for fiscal year 2016 to 2017, according to the CRA.  Imagine how a surprise tax bill of $4,000 waiting for you around the corner could impact your financial journey:    

What can be done about all of these threats to Canadians’ financial freedom?   It makes good sense to begin with taking the time to learn more about how a tax or Real Wealth Management specialist can help you calculate mortgage interest – and discuss ways to make it tax deductible - understand your tax compliance responsibilities and manage your relationship with the CRA.  

If you are a professional, it’s important to stay up-to-speed for your clients.  Learn more about the latest issues for professional advisors and their clients as Canada’s best-selling tax author and educator, Evelyn Jacks, drills down on key tax news and audit triggers for tax years 2022, 2023 and 2024 on September 20 at the Virtual CE Summit, which will also feature special guest instructor, Alan Rowell, RWM™, MFA™, DFA-Tax Services Specialist™.