In a worrying replay of the crisis of 2008 and 2009, lending rates in Canadian credit markets continued to react to the growing turmoil over European debt, with key overnight bank lending spreads doubling since February.

“We are starting to see interbank lending rates back up again and that’s an unfortunate development,” said Doug Porter, deputy chief economist at BMO Capital Markets. “We are starting to see investors shun any kind of risky trade again, whether corporate bonds or equities. We are seeing risk aversion right across the board.”

While Canada has only modest direct exposure to troubled European countries, like other major economies it is feeling the indirect impact of turmoil in global financial markets sparked by fears of a possible sovereign default.

The early days of the crisis that climaxed early last year were characterized by a steady retreat by lenders from any kind of risk, reflected in steadily rising rates that banks charged each other for short-term loans, which eventually moved so high that interbank lending was effectively halted.

Conditions in Canadian credit markets are still nowhere near where they were in March 2009 at the height of the storm but the widening of spreads in just about every sector is a worrying “echo of what happened,” Mr. Porter said.

The comments come after German Chancellor Angela Merkel slapped a ban on the short-selling of certain kinds of stocks and bonds, that sparked anger among other European leaders and sent equity markets into a tailspin as investors concluded the European bailout was unravelling.

The closely watched London Interbank Offered Rate climbed to the highest level in 10 months earlier this week as international banks hoarded money and investors grew more leery of risk.

Meanwhile, a U.S. Federal Reserve governor yesterday warned that the European troubles could spark another financial crisis, with credit markets freezing up around the world all over again.

“The European sovereign-debt problems are a potentially serious setback,” Daniel Tarullo said in testimony before congressional subcommittees.

But Mr. Porter said the markets have now moved beyond that and are now focused on the possibility of “a deeper global slowdown” that would result if the European issues are not contained.

As a major global economy roughly the size of the United States, Europe is a key driver of global growth and if European demand starts to fall, as is already happening, the rest of the world will feel it.

As a major global economy roughly the size of the United States, Europe is a key driver of global growth.

If European demand starts to fall, as is already happening, the rest of the world will feel it.

That includes regions such as Canada and China that have so far avoided serious recessions.

Indeed, Canada emerged largely unscathed from both the crisis and the economic downturn that followed partially because Canadian governments did a better job of handling their finances than most other countries.

But one reason for the widening of credit spreads on Canadian government debt may be that investors are starting to take a second look at the quality of that debt.

In a report titled Is Canada Really So Pristine on the Debt Front, Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc., notes that Canada is average with other major countries in terms of the size of its debt, about 83% of gross domestic product, sandwiched between Britain (78%) and the United States (93%).

As a result of being downgraded by most of the rating agencies about 15 years ago, Canada lost its appeal to many foreign investors and little Canadian debt is now held by foreign institutions, which is a good thing when credit markets are roiled.

However, Canada still faces the worry that holders of its debt may not be willing to renew, known as “roll-over risk,” and once again we are about at “the middle of the pack” internationally, Mr. Chandler says in the report released yesterday.
Read more: http://www.financialpost.com/story.html?id=3054501#ixzz0oYt2D0pG

Higher than expected rates of inflation and reports of record breaking retail sales means interest rate hikes will likely go ahead, according to a top economist with BMO Capital Markets. But domestic strength might not be enough to justify increases if the upheaval in global markets continues, said Porter.

“If the (Bank of Canada’s) decision was based solely on domestic factors, then this would be no questions asked, no debate,” said Doug Porter, deputy chief economist.

The central bank has long predicted rates would rise on June 1, but Porter said doubt over the future of global economic stability could cause them to go off course.

“It would take a very brave central bank indeed, I think, to raise interest rates in the face of the turmoil we are seeing in global financial markets right now.”

According to Statistics Canada’s Consumer Price Index, the core index advanced 1.9 per cent during the 12 months leading up to April, following a 1.7 per cent increase in March.

The boost in April was due mainly to a rise in prices for the purchase of passenger vehicles, passenger vehicle insurance premiums, property taxes, and food purchased from restaurants, the report showed.

The seasonally adjusted monthly core index rose 0.2 per cent in April, following a 0.3 per cent decline in March.

Consumer prices across the country rose 1.8 per cent in the 12 months leading up to April, following a 1.4 per cent increase in March. In Ontario, prices rose 2.2 per cent.

Porter said BMO has no plans to alter their position that rates will rise on June 1, but said that position could change if market upheaval continues into next week.

“If Canada were an island there would be no debate,” said Porter. “There is a very compelling domestic case for higher interest rates.”

Statistics Canada reported a 2.1 per cent increase in retail sales dollars in March, to $37 billion. Porter said earlier reports had predicted sales would be close to flat. “Instead we get one of the best gains on record.”

National energy prices rose 9.8 per cent between April and the same time the previous year, following a 5.8 per cent increase during the 12 months between March 2010 and the same time the previous year. Excluding the increase in energy the index rose 1.1 per cent, compared with a 1 per cent increase in March.

For the sixth month in a row, gas prices exerted the strongest upward pressure on the index. In April, Canadians paid 16.3 per cent more at the pump than they did the same time the previous year. That change follows a 17.2 per cent increase between March of this year and the same time in 2009.

Natural gas prices were up 3.3 per cent in April than the same time the previous year. Between March 2010 and the same time the previous year prices had dropped 22.4 per cent.

The cost of transportation was up 6.2 per cent in the 12 months to April and consumers paid a 5.6 per cent more for insurance premiums in April compared to the previous year.

Housing costs were up 0.8 per cent, after declining 0.7 per cent in March, with household utilities exerting the most upward pressure. The mortgage cost index fell 6.1 per cent, the report showed.

Food prices were up 1 per cent, following a 1.3 per cent increase in March. The 1 per cent rise, largely related to prices for food purchased in restaurants, was the smallest since March 2008.

Health care prices rose 3.3 per cent, the report showed. http://www.thestar.com/business/article/812567–rate-hike-not-guaranteed

A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.

We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it’s easier to qualify for them.

On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.

Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.

But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there’s no check.

“It’s definitely a headlock and not a loophole because a loophole you can get out of,” says Vince Gaetano, a mortgage broker with Monster Mortgage.

There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.

Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.

Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.

“It’s not all of them, but a majority of first-time buyers with just 5% down or less won’t be able to qualify if they go to another bank,” Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate – about 200 basis points lower than the current qualification rate.

If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn’t meet the test of having 20% equity in their home.

Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn’t been a huge impact.

“There will be a segment of the population tied down by the new rules to their bank,” Mr. Beaudry says.

That’s a position nobody should be in.
Read more: http://www.financialpost.com/story.html?id=3057768#ixzz0owPZtf4I

A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.

We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it’s easier to qualify for them.

On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.

Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.

But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there’s no check.

“It’s definitely a headlock and not a loophole because a loophole you can get out of,” says Vince Gaetano, a mortgage broker with Monster Mortgage.

There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.

Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.

Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.

“It’s not all of them, but a majority of first-time buyers with just 5% down or less won’t be able to qualify if they go to another bank,” Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate – about 200 basis points lower than the current qualification rate.

If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn’t meet the test of having 20% equity in their home.

Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn’t been a huge impact.

“There will be a segment of the population tied down by the new rules to their bank,” Mr. Beaudry says.

That’s a position nobody should be in.
Read more: http://www.financialpost.com/story.html?id=3057768#ixzz0owPZtf4I

Canadians likely have only two weeks left to enjoy historically low interest rates.

With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.

Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.

Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.

The reason, says the bank’s director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.

“The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they’ve got to start adjusting now to get the interest rate at what would be considered more neutral,” she explained.

“And if they don’t go now, it could mean we see bigger adjustments down the road,” she added.

Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.

Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.

The TD Bank and many others believe Canada’s policy rate will hit 1.5 per cent by year’s end, more in line with inflation.

Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.

He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.

But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.

The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.

Those numbers are still below the bank’s two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.

That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year’s end.

“Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets,” write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.

Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there’s a big downward surprise in underlying inflation Friday.

Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country’s manufacturing and exporting sectors.

But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie’s recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds. http://ca.news.finance.yahoo.com/s/18052010/2/biz-finance-friday-s-inflation-rate-expected-open-door-interest.html

The federal government is putting the moves on movers.

Industry Canada wants to tighten the rules for moving companies after a deluge of complaints from consumers who say they’ve been ripped off by crooked operators.

Armed with a cellphone and a Kijiji or Craigslist ad on the Internet, scam artists are preying on Canadians looking for cheap moving help, says the department.

“Complaints include holding furniture hostage at the destination until consumers pay more than the original estimate and producing new hidden costs such as packaging,” says an internal document.

“In some cases, the belongings are not delivered but are dumped or remain in warehouses and storage facilities. Consumers in this market are particularly vulnerable to such practices because of the ability of movers to confiscate or ransom their belongings.”

The Consumer Measures Committee, a federal-provincial group run by Industry Canada, launched a project last July to better monitor the household moving sector by analyzing consumer complaints.

“This work is in the very early stages of development and findings are not yet available,” department spokesman Michael Hammond said.

Regulation of the moving sector is largely a provincial responsibility, even though some moves cross provincial boundaries. Eight provinces have highway traffic legislation that governs the household-goods moving trade, with Prince Edward Island and Newfoundland and Labrador the exceptions.

Many provinces also have consumer protection laws, as does the federal government.

But industry players contacted by the committee in the last few months say officials want to end that patchwork coverage by harmonizing laws, regulations and practices across the country.

The 2006 census of Canada found that 1.2 million households had moved in the last five years. Some estimates say Canadians change addresses an average of 13 times through their lifetimes.

And the Canadian Council of Better Business Bureaus says complaints about movers were No. 7 on its Top 10 list of consumer beefs in 2009. Just over half of the 636 formal complaints about moving firms last year were settled.

An Industry Canada briefing note, obtained under the Access to Information Act, suggests about one of every four moves generates a consumer complaint.

The head of Canada’s largest industry group, the Canadian Association of Movers, supports harmonization but says the best protection for consumers is education.

“You have people having all their life possessions destroyed, stolen, rifled through, held for ransom, overcharged,” president John Levi said in an interview from the group’s Mississauga, Ont., headquarters.

But even with tougher regulations “there’s no government agency out there that can help you in a timely fashion.”

Consumers are understandably intimidated by large men suddenly demanding more cash before unloading the truck, Levi said.

“There’s sufficient legislation and regulation in place — if it were enforced.”

The best defence is to do some research, he said.

The mover’s association — with about 200 members, including big operators like Atlas, Allied, Mayflower, United, North American — certifies its firms after checking their standards and reputations, and having them sign a code of ethics.

The Better Business Bureau as well as Industry Canada posts consumer checklists and advice on moving on their websites. A joint consumer tips release is also planned shortly by the movers’ association and the business bureau.

Better Business Bureaus across Canada fielded almost 98,000 inquiries about moving companies last year, the second-most common query after consumer questions about roofing contractors.

http://ca.news.finance.yahoo.com/s/09052010/2/biz-finance-feds-want-tighter-rules-ground-fly-night-movers.html

Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians’ appetite for spending money they don’t have.

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That’s $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

“This report is another indication of Canadians’ readiness to consume today and pay later,” says association president Anthony Ariganello.

“The concern is do they understand the full cost of paying later?”

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don’t yet share that concern. The accountants’ survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.

Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada’s decision to slash rates to historic lows during the recession.

“That’s why we did not experience a great recession,” he noted. “That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem.”

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike. http://ca.news.finance.yahoo.com/s/11052010/2/biz-finance-recession-didn-t-slow-canadian-s-spending-report.html

Don’t shoot me. I’ve come to believe that the Harmonized Sales Tax (HST) introduced by British Columbia’s Liberal government was the right thing to do.

It’s hard not to think so, if you take the time to speak with tax policy experts, look at the results of HST in other jurisdictions (most notably Atlantic Canada), and consider that most other provinces are following Ontario’s example by moving to HST.

The opposition can muddy the waters, and consumers can complain that they are getting the short end of the stick, but the truth of the matter is very simple — HST was a good policy move by the B.C. government.

Is it perfect? Of course not — no government policy decision ever is. Are there going to be losers, especially in the short-term? Of course there are, there always are. Is this a policy that makes so much sense for the government that it belongs in the ‘no brainer’ category? Absolutely!

And it isn’t just the government that believes so. Professor Kevin Milligan from the Department of Economics at the University of British Columbia is an enthusiastic supporter of the new tax policy and gave it high praise when I spoke with him last week. “HST isn’t a left-right issue, and it isn’t ideological as far as economists are concerned. It is just good policy,” said Milligan. He went on to point out that “It isn’t pro-business and anti-consumer. It is the necessary modernization of tax policy.”

Over time, consumers will benefit

After I spoke with Milligan, The Tyee published a column highly critical of the HST for B.C., written by former NDP MLA David Schreck, who is a trained economist. Milligan fired back in the comments below the article, Schreck responded in turn, and a spirited back and forth ensued with economist Stephen Gordon jumping in. No doubt the debate is a hot one.

What seems to be lost in the HST argument, however, is that in the long-run, switching to a value-added tax instead of a retail sales tax is hugely beneficial to consumers. The current PST is an embedded cost in most of the good and services we purchase. Just because we don’t see PST on the receipt doesn’t mean we didn’t pay it. Businesses paid the PST and passed it right on to us as consumers. What is worse is that the current PST is a cascading tax, which means that often the embedded PST was paid multiple times depending on the supply chain of the good. B.C. consumers are often paying double or even triple PST as an embedded cost without even knowing it.

By implementing the HST system, the government is cutting the cost of doing business. It is reducing the marginal effective tax rate (METR) by 40 per cent. This makes business investment cheaper and will help the entire B.C. economy recover from the economic crisis. The METR is one of the most important drivers of productivity and the 40 per cent reduction will be worth $1.9 billion to businesses in B.C.

While some are clearly content to argue that this shows a pro-business bias on the part of Gordon Campbell’s Liberal Government, such an argument is very precarious. Individuals rely on a strong business environment to drive the growth of our economy. I know it is akin to blasphemy in some circles to concede such a point, but like it or not, we are all hurt by a weak business environment.

What matters is the ‘passthrough effect’

However, it is indisputable that in the short-term the burden of this reform will fall on the shoulders of consumers. The magnitude of this burden will be dictated by what is known in economic terms as the ‘pass-through effect’. This is the idea that in a competitive environment, businesses will pass their savings on to consumers in an attempt to increase market share. Simply put, HST will save businesses money and these businesses will in turn pass these savings through to consumers, which should balance out the seven per cent hike on the price of many goods from the HST.

This point is a little more contentious. There is a great deal of economic analysis about the passthrough effect and some disagreement about the speed and magnitude of the effect. Professor James Brander from the Sauder School of Business at UBC has some concerns about the scope of the passthrough effect in regards to HST in B.C. According to Brander, “There is a mountain of evidence showing that the pass-through effect will not be 100 per cent, and it is difficult to know how long it will take for some of the savings to reach consumers.”

This point is supported by the government’s position; they hope to see a 75 per cent pass-through rate within the first year as in Atlantic Canada. This number is not just pulled out of thin air. The Finance Ministry’s position is based on the C.D. Howe Institute’s July 2007 study of HST in Atlantic Canada. The paper, entitled ‘Lessons in Harmony: What Experience in the Atlantic Provinces Shows About the Benefits of a Harmonized Sales Tax’, supports the government’s calculations in regards to the pass-through.

David Schreck attacked that study in his Tyee article. But Professor Milligan agrees with the government’s assessment, saying that “There is some rigidity in pricing, but competition is strong in BC and should facilitate a strong pass-though effect.” Milligan went on to point out that “We can see evidence of this overtime with other taxes, including the GST.”

Watch September’s budget closely

However, the pass-through effect was not the only concern raised by Professor Brander. He suggested that his preliminary back-of-the-envelope calculations led him to believe that dropping the aggregate tax rate of the HST from 12 per cent to 10 per cent would have been a viable option for the government. During a phone conversation last week Brander told me that “A two per cent cut to the total would be a net tax reduction — at 12 per cent I worry that HST is a slight tax increase.”

We will not know the answer to this until the next budget is released in September and we are able to see the details of the government’s calculations regarding the revenue-neutrality of the HST.

Milligan did not agree with his fellow UBC professor, pointing out that “I have not done the calculation yet, but it is likely that the tax credits, rebates and exemptions built into HST will make it revenue-neutral at 12 per cent.” Milligan also seemed keen to give the government some latitude, pointing out that “Revenue neutrality is more of a range and hard to guess at, it is never an exact science.”

Low earners will get tax credit

The tax credits, rebates and exemptions mentioned by Milligan are all important parts of the new tax policy. The government has indicated that part of the burden on low-income earners will be mitigated by a tax credit. According to the government’s website: “The maximum amount of the credit would be $230 for individuals with income up to $20,000, and $230 per family member for families with incomes up to $25,000.”

There are also point of sale exemptions on good such as fuel, children’s clothes, and books. The HST will also maintain the current GST exemptions — meaning that goods which are currently exempt from GST, like basic groceries, are also exempt from HST.

Furthermore, the HST will include a new housing rebate. Again the government’s website makes the rebate very clear:

“B.C. is therefore proposing to provide a partial rebate for new housing equal to five per cent of the purchase price up to a maximum rebate of $20,000. Since purchasers currently pay on average the equivalent of a two per cent tax through embedded PST, there will not be a tax increase for new housing valued up to $400,000.”

Government saves red tape costs

Another point in favour of HST is that it saves the government a lot of money — an estimated $30 million in administrative costs annually — as well as injecting $1.6 billion in federal funds into the B.C. economy. The position of the federal government in regards to HST was also an important catalyst behind the decision to adopt HST for July 2010. The government’s decision to support a rate of 12 per cent, allow the point of sale exemptions, and permit the B.C. government to phase in the import tax credit over five years made HST even more appealing to the B.C. Liberals.

A possible downside of HST is that by increasing the tax rate from five per cent to 12 per cent on certain goods, the government could be increasing the incentive for tax evasion or avoidance. Brander worries this will be the case. Milligan believes that HST will be more of an incentive not to cheat, especially from the perspective of businesses, because they will have to pay HST on their inputs and will need to report their sales. Furthermore, from the government’s perspective it is actually easier to police HST because they only need to be concerned with the final point of sale.

What was the premier thinking?

In the end, what both Brander and Milligan agree on is that HST is good policy.

Despite the support for HST from such tax policy experts, the detractors continue to adamantly oppose HST. What is most striking is the narrative that has emerged since July 23rd when HST was announced — that somehow the B.C. Liberals, led by Premier Campbell, are out to ‘screw over’ low-income earners, consumers, restaurants, and other services industries in favour of big business. The image they are trying to present is one of Premier Campbell sitting in his office months ago (well before the election) hatching a plan to ruin the lives of anyone and everyone who is not big business. This can’t be true.

Of course the Premier was considering HST before the election. The BC Liberals have been considering HST as a policy option since 2001 when Gary Collins was Finance Minister. Any discussions about HST before the election was simply due diligence by the government. It would have been neglectful of them not to discuss HST as a policy option.

The timing of the decision was dictated by practical policy reasons related to the incentives offered by the federal government, and by Ontario’s decision to move forward with the HST. As far as the B.C. government was concerned, Ontario’s decision made HST in B.C. a matter of ‘when’, not ‘if’. As is often the case with new policy, even really good policy, there is never the perfect time to introduce it — and rarely will the government be able to make everyone happy. There are often cases where good policy meets tough political realities.

This latest move fits in with a broader approach by the B.C. Liberals. Since this government came into office it has cut 37 per cent from personal income taxes. They have shown a consistent propensity for the shifting of taxes from income tax to consumptions taxes over the long-term.

The merits of that shift can and should be debated.

Still, it should also be noted that the NDP government of Manitoba, led by Premier Gary Doer, is likely to get on board the HST express. Every day he delays is damaging to the Manitoba economy. One has to wonder what Carole James is going to do when a fellow NDPer announces that HST is the future of tax policy in his province.

VANCOUVER, B.C. – Buying a house in the hot housing markets of Vancouver, Toronto and other major cities in recent years has been a possible dream for some first-time homebuyers only because many of those houses had suites they could rent out.

But new rules coming into effect April 19 will all but wipe out that advantage in the eyes of banks handing out mortgages.

“It makes it much more difficult for people with rental properties to qualify for their own mortgage on their personal residence,” said Vancouver mortgage specialist Patrick Mulhern.

The new regulations are designed to prevent speculation in the market, said Jack Aubrey, of the Canada Mortgage and Housing Corporation.

But Vancouver mortgage agent Mike Averbach said the new rules will do little to prevent investors from gambling in the housing market.

“They haven’t decreased risk,” he said. “They’re just not allowing you to use the income.”

Currently, landlords can use 80 per cent of their rental income to offset monthly mortgage payments. That means, if they receive $1,000 per month in rental income, they can use $800 to offset a $1,200 mortgage payment, leaving only $400 to be debt financed.

But under the new rule, only 50 per cent of a landlord’s rental income will be used. Even then, that money will not be used to offset their monthly mortgage payment. It will be added to their total income, forcing them to qualify for the entire monthly mortgage.

For instance, a person earning $100,000 per year in regular income plus $12,000 per year in rental income will have a total income of $106,000 with which to qualify for a mortgage on their own home.

Rental income is essential for many of his clients, Averbach said.

In cities like Vancouver, where the average home price in February was more than $662,000, rental offset is the only way many people can qualify for a mortgage and the new rules will keep many of his clients in condos rather than houses, he said.

“Putting a renter in your basement is not speculative, it’s reality,” he said. “It helps you pay your mortgage.”

The rule changes also make it more difficult for people to buy a property separate property to use as a revenue generator.

CMHC will no longer offer high-ratio financing on rental property not lived in by the owner. That means someone looking to buy a house as a rental investment will have to come up with a 20-per-cent down payment on the property, as opposed to five per cent before the rules changed.

The changes haven’t worried groups advocating for tenants.

Jeordie Dent, of the Federation of Metro Tenants’ Association in Toronto, where vacancy and availability rates have dropped over the last year, said he doesn’t see a negative impact on renters.

Instead, he said his group welcomes the changes.

Dent said too many people become landlords without the financial or intellectual wherewithal to properly manage their properties.

“Anything that strengthens mortgage rules, from our perspective, is a good thing.”