Henry report under fire over rumours of indexation return

OPPOSITION to an overhaul of capital gains tax rules intensified yesterday, with tax experts warning that the proposed changes would hurt investors and create havoc for dividend reinvestment plans.

The investment community is awash with talk that the Henry report, being considered by Wayne Swan, has recommended the reintroduction of indexation, a move likely to be greeted with widespread opposition.

KPMG tax partner Matt Hayes said yesterday that reverting to the old regime of indexation, effectively scrapped about 10 years ago, was contrary to the notion of trying to simplify tax return preparation.

He said for dividend reinvestment plans, indexation could be a “compliance nightmare” because investors needed to determine the capital gain based on inflation for every asset. Indexation can also be a headache for property or other non-managed fund investors who cannot rely on an administrator or fund manager to provide exact details of when the asset was bought and sold.

There has also been talk that the review, headed by Treasury secretary Ken Henry, is looking to ditch the 50 per cent capital gains tax discount for assets held for longer than a year for alternative options such as a standard flat rate on capital gains or a longer tenure-of-holding rule.

But Zurich Financial Services Australia acting head of technical services, Dimitri Diamantes, issued a warning that a longer period-of-holding rule represented a significant tax burden for investors who were forced to sell prematurely.

“A client who suffers a personal lifestyle crisis or who, because of economic events, needs to sell down investments, for example for a margin call, will be in a situation where they will have an added tax burden,” Mr Diamantes said.

One view is that the current 12-month holding rule does not encourage long-term investment and a sliding scale should be adopted whereby the capital gains rate reduces the longer an asset is held.

In its submission to the review, the Investment and Financial Services Association said a tiered discount based on years of ownership would be significantly more difficult for collective investment vehicles to administer and for individual investors to comply with.

One industry representative said fund managers were “up in arms” over the suggestion of extending the 12-month holding rule as very few held assets for longer than a year.

But there was also talk yesterday that the review may be looking to scrap the 50 per cent discount altogether as part of a plan to address the distortion in tax rates across the different classes of investments by introducing a standard flat rate.

Tags: Canada, Canada Mortgage and Housing Corporation, CMHC, Community, Housing, Mortgage, program, Tanya Hutchens

Hamilton and Brantford – Economic Trends

Rising Unemployment

Further job cuts are expected in 2009 and the unemployment rate for the year will remain at 8.7 per cent. Total employment in both the goods-producing and service-producing sectors in Hamilton has declined in recent months, leading to an unemployment rate that reached 8.7 per cent in the first quarter of 2009. In 2010, fiscal stimulus will help to improve local economic and housing market conditions.

Plant closures – both temporary and permanent – are rising and have contributed to nearly 3,000 fewer manufacturing jobs in the first quarter of 2009 as compared to a year ago. Drop in global demand for steel negatively impacted steel production in Hamilton, as well as industries which are related to steel production such as shipping and steel fabrication.
Furthermore, many planned projects in the manufacturing sector have been halted. Some employees in the manufacturing sector who are eligible for retirement and may consider retiring early instead of looking for work elsewhere. Fiscal spending and infrastructure spending will boost local employment, especially in the construction industry.
Although the overall service-producing sector has faced challenges in recent months with fewer retail sales and consumers less willing to purchase non-essential services, employment in the health care and social assistance sector rose 10 per cent last quarter.
Health science is becoming increasingly vital to local economic growth. In Brantford, employment is more heavily reliant on the manufacturing sector with over a quarter of all jobs in manufacturing. Temporary layoffs and plant closures primarily resulting from the downturn in the automotive industry continue to affect employment. The unemployment rate has reached new heights – 9.6 per cent in March – the highest unemployment rate in over a decade. However, plans for local economic growth are underway. The addition of new educa- tional institutions and programs at the post-secondary level and new infra- structure construction projects will add a number of jobs to the local market. The forecast for the unem- ployment rate is 9.2 per cent for 2009 before easing slightly in 2010.
Fewer employed people in Hamilton and Brantford, notes Tanya Hutchens, have resulted in fewer homes changing hands as households re-evaluate their finances. Home ownership this year will be geared towards first time buyers who have a stable job and a sufficient down payment. Many of these buyers will be interested in entry level homes such as townhouses and condominium apartments. Other households concerned about their job prospects will likely stay in their current dwellings, while some may consider options such as moving from ownership to rental or into a smaller home.

Mortgage Rates

Mortgage rates are expected to be relatively stable throughout 2009, remaining within 25-75 basis points of their current levels. Posted mortgage rates will increase very gradually during the course of 2010, reflecting a rise in government of Canada bond yields. For 2010, the one-year posted mortgage rate will be in the 4.75-6.00 per cent range, while three- and five-year posted mortgage rates are forecast to be in the 5.00-6.75 per cent range.

Tags: Business, Canada, Canada Mortgage and Housing Corporation, Employment, Health care, Housing, Manufacturing, Retailing, Secondary sector of the economy, Tanya Hutchens, Unemployment