Author Archives: Brian Poncelet

The High Cost of Low Corporate Taxes

For every dollar corporations pay to the Canadian government in income tax, people pay $3.50. The proportion of the public budget funded by personal income taxes has never been greater.

At a time when Prime Minister Justin Trudeau has made tax fairness a centrepiece of his government, the Toronto Star and Corporate Knights magazine spent six months poring over tax data to determine how much income tax corporations are really paying.

We found the amount of tax most big companies pay has been dropping as a proportion of their profits for years, and not only because the corporate tax rate has been cut repeatedly. Canada’s largest corporations use complex techniques and tax loopholes to reduce their taxes significantly below the official corporate tax rate set by the government.

With some exceptions, Australia charges a levy of 0.015 per cent every three months on banks’ riskier borrowing, “ensuring that the banking sector makes a fair contribution to the economy,” the government states on its website.

The same levy in Canada would have brought in up to $2 billion in 2016, bumping up the tax rate for the Big Five banks to 18 per cent from 14 per cent. A modified bank levy could also be applied more broadly to the financial sector. And since the financial sector accounts for more than two-thirds of the avoided taxes by all large Canadian corporations, a bank levy would go a long way toward ensuring corporations pay taxes closer to the official rate.

It’s a solution that the Mintz report, commissioned in 1996 by then-finance minister Paul Martin, recommended for Canada. The measure was to be called a “temporary increase in financial institution surtaxes” and was projected to bring in up to $300 million each year at the time.

The temporary surtax was to be phased out as taxes for the financial sector were brought into line with the rest of the economy.

Twenty years later, corporations – and especially banks – continue to pay less than the rest of us.

How we calculated the tax gap

We define the “corporate income tax gap” as the difference between total income taxes owed (official tax rate multiplied by pre-tax profits) and cash taxes paid from 2011 to 2016. This measurement is intentionally broad – it captures any form of tax reduction whether through tax sheltering, income shifting, tax preferences within the tax code, or rule changes. It also captures deferred tax: income that is not currently included in taxable income but may be at some later date. This is a methodology used by academics, the New York Times in a 2013 piece that looked at American companies and Canadian Business magazine in similar comparative studies.

Facebook admits that social media can be bad for you

Facebook acknowledged on Friday that too much social media can be bad for you, a remarkable admission as the 2-billion member online service battles mounting criticism about its impact on society.

In a blog post published on Friday, Facebook addressed a “hard question”: “Is spending time on social media bad for us?” In it, the social networking firm cites academic research indicating that in certain instances using Facebook can have a negative effect on people’s moods, and that heavier users of the site can have worse mental health.

“Researchers hypothesize that reading about others online might lead to negative social comparison,” wrote Facebook director of researcher David Finsberg and research scientist Moira Burke, “and perhaps even more so than offline, since people’s posts are often more curated and flattering.”

Facebook also cited research showing the positive impact of social media. “In sum, our research and other academic literature suggests that it’s about how you use social media that matters when it comes to your well-being.”

The post by Facebook underscores the thorny situation facing the company, which has built a $28 billion business on an advertising model that relies on people spending as much time on its site as possible. Globally, the average user spent 50 minutes every day using Facebook’s various suite of apps, CEO Mark Zuckerberg said in April 2016.

But Facebook also counters this with evidence that engaging with others online “is linked to improvements in well-being,” and that Facebook can have other positive impacts.

Heat, Humidity, And Heart Disease Could Be A Deadly Mix

You may be wondering why I am writing an article about heat and humidity a few days before the start of winter and as some of the coldest air of the year is poised to enter the United States.  Some may even be saying, “Hey Dr. Shepherd, it’s snowing where I am, don’t you know that means global warming is a hoax.” I would respond “no it means that I understand the difference between weather and climate and that winter is here.” By the way, it is basically summer now for of half of the planet, and Forbes is read internationally. We are also about to end what is likely the 3rd warmest year on record, and reports say that it is likely Russia’s warmest year in the past 130 years. A new international study found that heat and humidity may be a deadly combination for people suffering with cardiovascular (heart) disease.

Researchers in the School of Public Health at the University at Albany collaborated with lead investigator Professor Cunrui Huang of Sun-Yat-sen University. This team, which included other researchers in Australia and China, investigated the role both heat and humidity play in heart disease deaths. The paper was just published in the International Journal of Environmental Research and Public Health. I usually try to avoid too much emphasis on one study. I written in Forbes before on why it drives me crazy to see too much inference into or dismal of science based on a single study. It is important to note that this study was focused only on  11 cities in the Zhejiang Province of China, but it did examine a robust sample of cardiovascular-related deaths (120,544) from 2010 to 2013. I would also caution that the study uses correlation, and the old saying “correlation is not always causation” is relevant.

The University at Albany study suggests that WHO may need to ask specific wording about heat and humidity to their list of precautionary actions aforementioned. Heat and humidity have long been silent killers. I am still amazed that people will rush their child off a football field if a lightning storm approaches (as they should) but think nothing about letting the child practice in full pads in 105 degree heat index conditions. Many people think nothing about exercising or working in extreme heat and humidity conditions. I wrote about this in my first contribution to Forbes two years ago. Heat is underestimated because the danger is not as visible or immediate as a tornado or hurricane. In the United States, heat has killed more people, on average, in the past 30 years than other weather events according to the National Weather Service.

Canadians’ debt burden keeps climbing, hits record in third quarter

Statscan said the main contributor to the increase was mortgage debt, which grew by 1.5 per cent in the quarter, to $1.38-trillion. Borrowing continued to climb despite rising interest rates on mortgages, as the Bank of Canada raised its key rate twice during the quarter, by a total of half a percentage point.

The rise in mortgage borrowing also came despite evidence of a cooling in some of Canada’s key housing markets, particularly the Toronto market. The Canadian Real Estate Association’s home price index declined nearly 2.5 per cent in the quarter.

But economists believe some home buyers may have jumped into the market to take advantage of preapproved mortgages on which the interest rates were set before the rate increases, and to lock in before regulatory changes take effect that will toughen mortgage borrowing requirements.

“With home buyers rushing to get into the market ahead of the new [Office of the Superintendent of Financial Institutions] rule change that takes effect on Jan. 1, 2018, we could see a further increase in the fourth quarter,” said Bank of Montreal economist Benjamin Reitzes in a research note.

While borrowing continues to climb, Canadians’ household net worth dipped 0.1 per cent in the quarter, a function of the pullback in housing prices. Statscan said residential real estate values suffered their first quarter-to-quarter consecutive decline since 2009.

“We are concerned that a growing number of Canadians will put themselves at risk and be unable to maintain their household expenses and reduce debt levels in the future,” said Scott Hannah, president of the Credit Counselling Society, in a statement released in response to the Statscan report.

But with the new mortgage rules coming in next year, interest rates rising and key housing markets already cooling, economists are optimistic that the household debt trend will start improving in 2018.

“The rising cost of borrowing, and more reasonable trends in home prices, should slow credit growth in the years ahead. And with incomes expected to continue increasing, the trend in debt-to-income should flatten out – a development policy-makers are keen to see,” Mr. Nye said. “But even if that dynamic plays out, households will remain stuck with high debt loads – keeping financial system vulnerabilities elevated in the years to come.”

Three Things That Make A Great Real Estate Investment

Pays a Fair Cash-on-Cash Return

When you buy property you are taking money out of your liquid financial assets – stocks, bonds, CDs – and investing it into a very illiquid asset – real estate. You were earning a rate of return on your financial assets, such as 4 percent or 6 percent, and you should strive to earn a fair cash-on-cash rate of return on your real estate. To do this, you need to pro forma your deals and buy cash flow-positive properties that earn you decent returns – not those prize properties that are negative, negative, negative. For more guidance on this, see Smart Investing – A Tale of Two Townhomes.

Isn’t Too Risky an Investment

All real estate is extremely high risk. Development of real estate, land, Tenant-In-Common (TIC) investments, private real estate funds, fixer uppers, etc., all have much higher risk profiles than just simply buying a nice established cash flow investment property. In many of those investments, you will never see a dime of your money again because there are just so many things that can go wrong! So if you want to own real estate, consider simply taking fee simple title in your own name – or an entity you wholly own – to the properties you purchase. In addition, you must do the proper due diligence, analyze, test, review reports, etc., to make a lower risk real estate decision.

Doesn’t Require a Lot of Time or Managing

Some properties just require way too much time and management to make them smart investments. Examples include vacation rentals, low quality properties in bad areas, college rentals, etc. Nice boring properties rented for as long as possible to decent credit profile tenants seem to take the least time to manage. In addition, treating your tenants fairly and with respect goes a long way towards keeping good relations with them; and reducing your hassles when there is an issue you need to address. And believe me — there will be issues!

It’s the nice, boring, wholly owned, in good shape, cash flow-positive properties that are the best investments. They are out there for your picking, but it’s not as simple as finding a property on the MLS and buying it.

You need to do some hard work, research, read up, and make smart, educated decisions to acquire the best real estate investments!