Canada – Page 39

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.

Brokerage firms in Canada – Questrade Review

(June 19, 2012: A good chunk of this article is out-dated and will not be updated. Specifically they have changed their trading platform to emulate Interactive Broker’s TWS and apparently have increased their margin interest rates. The security concerns remain prevalent, although they do now ask a “security question” before logging in.)

(Article updated January 4, 2011 to update margin rates and put in a current rate of interest.)

(Readers may also be interested in reading A Questrade Failure [January 4, 2011], and Watch out for Questrade – Check those statements [February 16, 2011].)

I reviewed Interactive Brokers previously; I use them for my non-registered investments. For my RRSP and TFSA, and for TSX-traded debentures, I use Questrade.

Questrade

I transferred in my RRSP to Questrade in early 2008 from BMO Investorline. The primary attracting feature was the ability to retain US dollars in the account and not having to incur currency exchange fees whenever you transacted in US securities. Just as an example, ignoring commissions, if you bought USD$1000 of something, and then sold it the next day, you would probably pay around $40 of implied currency conversion charges at BMO Investorline. With Questrade, this is nothing, assuming you had the US currency in the account to begin with.

If you bought USD$10,000 of something and sold it the next day, your typical currency conversion charges (going from CAD to USD and USD to CAD) would be around $400 – with Questrade, it is nothing. For anybody transacting in US dollar securities in their RSP, it is an essential feature.

The RSP transfer took about a month. It also took them another couple months to refund the RSP transfer fee, but they explained this up-front.

The web-based interface for Questrade is very simple – it is missing a basic feature of “how much will this entire transaction cost” whenever previewing an order, but other than this, it is OK. The problem is mitigated by using a desktop calculator. They provide a better platform for active traders, but I have never used it and probably never will. They provide three separate logins for account information and trading, but once you’ve bookmarked them, it is surprisingly easy to get detailed access to your information. In particular, their clearing is performed via the Pension Financial Corporation, and the historical account information they provide through this interface is comprehensive. I can easily see how people that are not as “in-tune” with web navigation would find this system very confusing.

Costs at Questrade are very cheap – basically a trade costs $1 per 100 shares, minimum of $5, maximum of $10. They are also the cheapest Canadian broker to trade TSX-traded debentures – basically the standard commission charges (as if you were trading stocks) applies – so it would be about $10/trade. Most other brokerages charge around $40 per trade, plus $1.50 per $1000 par value – which could make trades very expensive. Questrade does not charge any inactivity fees or any other “garbage” fees, but something people should be aware of are fees for taking liquidity away from the market (i.e. buying at the ask, or selling at the bid) which would amount to material sums if you are dealing with penny stocks.

Questrade’s margin rates currently (as of January 4, 2011) are 4.5% for Canadian dollars, which is prime plus 1.5%. They generally are in line with other “big name” brokerages (e.g. BMO Investorline is at 4.25% or prime plus 1.25%), but both do not come close to Interactive Brokers.

I have no problems with Questrade customer support – they have an online web-chat interface and sometimes it takes awhile to get a customer support agent, but once you do get on with them, they are fairly responsive. I suspect most of the people that have complained about Questrade (and there are a lot of financial forums that have supremely negative reviews on them) didn’t have a clue what they were doing (e.g. dealing with Canadian vs. US dollar securities, or wondering why their shares got sold out when they had a margin call).

Deposits and withdrawals are simple – provide the EFT information, and a few button clicks is what it takes to fund accounts or withdraw funds from accounts. The withdraws typically take three business days to process, and I have always received my funds promptly.

For a simple buy-and-hold investor, Questrade seems to be a decent and low-cost provider. They aren’t going to win any awards for any of the other ancillary services brokerages provide (research, fancy interface, hand-holding customers), but if you don’t care about those, they serve the job very adequately for RRSP and TFSA accounts. I have no idea how they are for active traders.

Questrade’s inadequate security

The reason why I can’t give a blanket endorsement of Questrade is security – they do not offer any sort of guarantee (e.g. BMO Investorline’s Online Security Guarantee) against hackers, and unlike Interactive Brokers, if somebody managed to rip off your username and password, they can do a lot of financial damage to your account. This is my biggest concern with Questrade, and it is a sufficiently high concern that I wish they would offer some sort of guarantee against hacked accounts, and/or provide an account authentication system that is similar to Interactive Brokers. In addition, Questrade is privately held and as a result, one has no idea how financially solvent they are. Although Canadian investors are protected through CIPF, you do not want to have to reclaim your assets through this mechanism.

The reader might wonder why I am concerned about an issue that has not materialized for me – I am very cognizant of potential risks. I do not want to have to suffer through a security incident before taking measures that will protect me. I do not believe Questrade takes security seriously enough beyond the typical lip service of telling its customers to “run a firewall and a virus scanner” and as a result, some of its customers will have their accounts compromised. Although I am very computer-savvy and it is unlikely that a phishing scam will get my username and password, it could happen and I want a form of protection beyond a username/password combination to make sure that my account is protected. Questrade does not offer this.

Until they provide better provisions with respect to account security and provide some more transparency on their own financial solvency, I only will give them a tepid recommendation. The only reason why I use them is they support RRSP/TFSAs well and they allow inexpensive trades on TSX-traded debentures. If they beefed up their security, I would rate them much more highly than present. I just don’t get that warm and fuzzy secure feeling that I do with Interactive Brokers.

Unlike practically all other financial blogs out there, I won’t insult you (the reader) by offering some referral scheme, which they do offer – I do these reviews without remuneration.

Canadian dollar at parity to US Dollar

For the first time in about two years, and a rare event in a generation, the Canadian dollar is worth the same as a US dollar. The following is a three-year chart of the Canadian Dollar vs. the US Dollar:

This can probably be explained by a few factors:

1. Rate differentials: The Bank of Canada is expected to have a higher interest rate than the US Federal Reserve, thus moving carry trade dollars into the Canadian currency;
2. Commodities: Canada is seen internationally as being concentrated with commodity markets. Thus, more demand for Canadian dollars due to high exports of more expensive commodities;
3. Fiscal factors: The Canadian government is less of a fiscal basket case than the US government, thus inspiring confidence in Canadian bonds, thus giving the currency higher value.

The question is whether this trend will continue or whether there will be some sort of regression of the mean (the Canadian dollar traditionally has been around 80 cents US throughout its lifetime). I truly don’t know.

With a strengthened dollar, consumers win because their dollars have higher purchasing power. Prices in Canada are always higher than in the United States, so a cross-border shopping trip will probably have more value realized.

Also, investors should probably take a look at currency concentration and perhaps consider diversifying into US equities if they are primarily concentrated in Canadian currency.