Canada – Page 38

A simple risk-free money procedure

This post is not to be taken seriously, but if you actually tried it, it would work.

Steps:

1. Have marginable assets (i.e. shares of widely held and liquid companies) in Interactive Brokers.
2. Withdraw cash from Interactive Brokers. For every $100 in shares you have, you will be able to borrow $70 in cash (using Canadian shares of widely held companies as an example, which allow for 30% margin). This obviously leaves zero room for a decline in equity price, so you would have to judge accordingly.
3. Observe margin rate. Currently 1.753% for the first $120,000 and 1.253% for the next $980,000.
4. Deposit cash proceeds into Ally, with a current interest rate of 2%. (Note: The risk here is that Ally would go belly-up, and CDIC only covers $100,000).
5. Whenever the margin spread goes to zero, close the transaction.
6. When it comes to tax time, remember to deduct the interest expense (margin) against the interest earned.

Assuming you had $142,857 in stocks in your account, you could conceivably pull out $100,000 cash and be able to earn an extra pre-tax $247/year, at current rates risk-free!

Obviously there is a limit to how this scales up, but you can easily see how the same procedure can apply to anything else with a higher yield. The risk you have to manage is the risk of losing principal on the investment (in this case you are investing in cash earning 2%, but in real-life scenarios people would typically invest in preferred shares or corporate debt or any other yield-bearing investment), liquidity risk (if another 9/11 happened and you were not able to sell your shares, you would be in trouble) and margin risk (making sure that you are not forced to liquidate the holdings).

Borrowing money at low rates and investing it in higher rate products is what banks and insurance companies typically do, but there is no reason why retail investors, assuming they know what they are doing, can’t get in the action as well.

Canadian Fiscal Monitor, February 2010

The government of Canada released its fiscal report for the 11 months ended February 2010, and we continue to see considerable improvement compared to last year’s results:

In the February 2009 vs. 2010 (one month) comparison:
1. Corporate income tax collections are up 31%;
2. GST collections are up 52%;
3. Other excise taxes and duties are up 22%;

Employment continues to be weak; EI payments are up 35% from the previous year. As EI benefits will only last one year, it is likely that during the same period in 2011 that this number will be lower as employment picks up.

The next month will have tentative results that I will make year-to-year comparisons with, in addition to seeing where the government was significantly off with its fiscal projections compared to the Budget 2009 document that was tabled in late January 2009.

Living off of government benefits

There is an article in the UK that describes a family with 8 young children, and the husband quitting his job because the benefits they get from the government are higher. Their take-in is about £815/week which is about £42,380/year, or about CAD$65,100 using current exchange rates.

I do not know whether the numbers are correct, and I highly suspect the article is designed to be inflammatory. I also have no idea what specific social benefits are available in the United Kingdom.

However, I have pondered what somebody in Canada or British Columbia could get if their goal is to minimize work and live off the government. I can’t think of a situation implied like the above article where you effectively have an over 100% marginal tax rate for working. There are situations that come close. There are hypothetical scenarios if your job in life is to maximize government benefits. Note the majority of these use the most current up-to-date 2010 figures, but some 2009 figures may have inadvertently slipped into the following calculations:

1. Assume you have 1 child. This will qualify you for a lot of benefits. It’s also usually better, for government benefits purposes, that you are single as having a significant other making money seriously impairs your ability the claim the benefits discussed below. If you do desire a significant other, do not marry them and live in separate accommodations will maximize the ability to obtain benefits (for you and them!). Having two children will decrease the marginal benefits received compared to having one child.

2. Earn $21,816 in the year. This will qualify you for the following PROVINCIAL benefits:
– Full MSP assistance (free for those under $22,000/year, a $1,224/year annual benefit). I am also assuming no benefit with respect to Pharmacare (which has a lower deductible for lower income individuals).
– Starting July 1, 2010, the BC HST credit (for a family under $25,000/year, a $230/year annual benefit plus $230 for dependent)
– Climate Action Dividend (for a family under $35,843/year, a $105/year benefit, plus $105/year for first child)
– BC Tax reduction credit, essentially a non-refundable reduction in the income tax rate for low income individuals (for $17,354/year, $390/year benefit, reducing by 3.2% above the limit, so in this specific example, $247.22/year benefit)
– BC Child Care Subsidy; while the requirements to qualify are not specific (they do not give a monetary threshold) this would qualify for up to a $750/month ($9000/year) subsidy for early child care. I am not factoring this in to any future calculations in this post.

You will make too much money and miss out on:
– BC Sales tax credit (for a family under $18,000/year, $75/year annual benefit, reducing by 2% above the limit) – I believe this might be phased out with the BC HST credit.

3. A $21,816 income will qualify you for the following FEDERAL benefits:
– Assuming you were working at $21,816/year before having the baby, 50 weeks of Employment Insurance benefits of $230.75/week, or $11,537/year.
– The child will enable you to receive the $100/month Universal Child Care Benefit (UCCB), which is $1,200/year until the child turns 6 years old.
– Federal GST/HST credit (up to $32,506/year income, annual credit amount $631/year with the child)
– Working Income Tax Benefit (WTIB), which is complicated to explain the actual calculation in a sentence, but for a single mother of one child making $21,816/year, works out to a refundable tax credit of $751.28/year.
– Canada Child Tax Benefit and National Child Benefit Supplement and BC Earned Income Benefit – under $23,855/year income, the benefit is $3,528.84/year.
– Canada Learning Bond (CLB), which if you open up an RESP for your child (not frequently done I am sure) will result in a $525 benefit in the RESP immediately, plus $100/year providing you qualify for the National Child Benefit Supplement.

4. Live in social housing or get rental assistance. Although it was difficult to find exact numbers to work with, apparently you can get rental assistance that will net out your rental balance to 30% of your net income. This is also why it is important to keep your income relatively low if your job is to maximize government benefits. If you earn $21,816/year, this will result in an effective rental rate of $545.40/month, which is significantly under market in Vancouver. I am going to take a gross approximation and assume $1,000/mo for a 2-bedroom apartment somewhere in Greater Vancouver which would be a subsidy of approximately $455/mo or $5,460/year.

You add all of this together and get the following results:
a. Excluding EI (which you can claim a credible argument for having paid into the program by virtue of being employed), you will receive approximately $8,252.34/year of either cash payments or payments that are otherwise mandatory that you will not be required to pay; this does not include social housing benefits, and I am excluding the RESP boost since almost nobody will be taking this option.
b. With social housing, that goes up to approximately $13,712/year.

So somebody earning $21,816/year (note: this is about $10.50/hour, full-time 40 hours/week) with a child will be receiving a subsidy of about $13,712.34. This is about 63% of their existing income level. In terms of their income statement, it would be this:

Salary – $21,816
Minus: CPP – $907
Minus: EI – $377
Minus: Income taxes – $0 (none; the child vastly increases the tax credit amounts available to the parent, plus provincial taxes are reduced to zero by the BC Tax Reduction Credit)
Net cash from work: $20,532

Add all of the following:
BC HST Credit: $460
BC Climate Action: $210
UCCB: $1200
GST/HST: $631
WTIB: $751
CCTB and supplement: $3529

Net cash after benefits: $27,313

Minus rent: $6545 (30% of income, assumed to be the “salary” in this case)

Net: $20,768

This is a good sum of money after taxes and rental. Looking at my own personal budget, assuming I had the appropriate rental subsidy as #4 above, I would actually be pulling in a mild surplus. The only real difficulty is the ability to maintain work while taking care of the child at the same time (not easy!).

Now, let’s assume that you earned $35,000/year ($16.83/hour for a 40 hour/week full-time job) as a single parent. This is the most you can earn and still be eligible for social housing benefits. This is how the math would work out:

Salary – $35,000
Minus: CPP – $1559
Minus: EI – $606
Minus: Income Taxes – $1968
Net cash from work: $30,867

We now factor in the benefits:

Minus: MSP – $1224
Add: BC Climate Action – $210
Add: UCCB – $1200
Add: GST/HST – $506
Add: CCTB and supplement – $2185

Net cash after benefits: $33,744

Minus rent: $10,500 (30% of income, assumed to be the “salary” in this case)

Net: $23,244

The difference in earning $13,184 in more pre-tax income will translate into approximately $2,476 in disposable cash after housing rental payments. While the effective marginal tax rate in these circumstances is below 100%, it is quite high (81%).

The quick conclusion that I have is that there is a high level of incentive to work part-time if you are in a middle-wage job if you are single and with a child. For example, if you are working in a clerical type job with a moderate amount of experience, the cost of having to stay at home one, two or even three days a week without pay is not that financially punishing because the government subsidies significantly make up the shortfall. Especially when you net this out with the cost of childcare, it is easy to see how people in BC that value their time more than their money would purposefully keep their income levels below the specified thresholds in order to maximize their government benefits.

Bank of Canada will raise interest rates on June 1

The Bank of Canada released its monetary policy announcement today, and it contained the following paragraph:

In response to the sharp, synchronous global recession, the Bank lowered its target rate rapidly over the course of 2008 and early 2009 to its lowest possible level. With its conditional commitment introduced in April 2009, the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.

This means that at the next Bank of Canada meeting on June 1, they are likely to raise interest rates. The futures say it will likely be a 0.75% hike up to 1% in June, and then the rate increases will be 0.25%. My new projected schedule of rate increases will be as follows:

June 1, 2010 (+0.75% to 1.00%)
July 20, 2010 (+0.25% to 1.25%)
September 8, 2010 (+0.25% to 1.50%)
October 19, 2010 (+0.25% to 1.75%)
December 7, 2010 (+0.25% to 2.00%)

Shaw Communications – Moving into Wireless

An article questions Shaw’s slow entry into the Canadian Wireless market.

RBC Capital Markets analyst Jonathan Allen said the delay gives other new competitors time to gain traction before Shaw is even in the market.

…

“It’s difficult to say whether Shaw launching with LTE is the right move,” Allen wrote in a research note, noting Shaw would be among the first globally to choose this network standard.

My opinion is less questioning – waiting is completely the correct decision. The reason is that there is no first mover advantage in this second expansion of the Canadian wireless domain. With incumbents (Telus, Bell and Rogers being the big three) having a dominant advantage in terms of size, capital and capability, it will be difficult for newcomers to quickly penetrate into the marketplace. My guess is that Shaw will be carefully looking at how Wind Mobile, Public Wireless and Mobilicity perform before doing their own launch.

In the strategic sense, Shaw must get into the wireless space – they have a huge customer base with their cable and internet services, but their expansion into the phone space has been slow, mainly because landlines are now obsolete. A wireless expansion that bridges the internet and voice service seems to be quite a logical move. Their system needs to be able to deliver enough reliable bandwidth to provide both voice and highspeed data service. They will also have the ability to bundle this with their cable packages, and as a result may have better success with market penetration than other providers.

In terms of valuation at a glance, Shaw’s equity appears to be fairly valued. I don’t see a compelling story that would boost their equity price dramatically – it would be an economic miracle if they doubled in five years from their current market capitalization of $8.1 billion. They also are capitalized by $4 billion in debt, supported by roughly $600 million of yearly free cash flow at present. Construction of a wireless network is likely to cost a lot more, so it remains to be seen whether they will decrease the dividend or raise more debt capital to finance it. Shaw does have the advantage of having their billing and customer support infrastructure established, which is something the other new upstart providers are struggling with.

As a company, I have always liked Shaw’s positioning and corporate direction. As an investment, I have never found them compelling. Their common shares will represent a good store of value in terms of their ability to drive cash flows from Canadian’s desire to receive cable and communication services, but I will not project much in the way of capital gains.