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Kim G C Moody’s Musings – 1-1-1 Newsletter For November 29, 2023

 

One Comment About Taxation – The Canadian Short-Term Rental Proposal From the Fall Economic Statement

 

Housing affordability and availability is a complex public policy issue. There is unlikely one expert who “knows it all” since it involves – at a minimum – a great understanding of many disciplines and how they all intersect. This includes immigration policy, infrastructure knowledge, economics, public policy, how entrepreneurs “tick,” labour certification and supply issues, provincial landlord and tenant legislation, taxation policy, etc.  If a single expert on housing exists, I’ve yet to meet them in my lifetime.

In a growing country such as Canada, housing availability has long been a problem.  Accordingly, careful balancing and consideration of the above issues is tricky for governments and requires informed and properly timed deployment of policy tools. Or, in some cases, just staying out of the way.  For example, last year, the government of Canada announced that 405,000 immigrants came to Canada in 2021 – the most ever.  It also announced plans to continue with such record increases by increasing yearly immigration numbers to 500,000 by 2025.  With recently increased immigration numbers, one can logically ask where these new Canadians will live.  Is Canada’s infrastructure ready for such increased numbers?  My two cents is that Canada’s infrastructure – including housing – is not prepared for such massive increases despite the overall importance of immigration.

From a tax perspective, the federal government’s approach to Canada’s housing availability appears to attack the “boogeymen”.  First, the “boogeyman” was the evil non-residents / non-CDN citizens that were causing Canada’s housing problems.  Accordingly, in 2022, the government introduced the poorly thought-through foreign buyers ban and then the Underutilized Housing Tax.  If non-residents / non-Canadian citizens were the issue, then I have certainly not seen compelling statistics and anecdotal evidence to support such assertions.  Next, it was the evil property flippers that were a problem, so they introduced a new “flipping tax” (one of the most poorly thought-out tax measures ever seen in my lifetime…especially given that the Income Tax Act already has good provisions to deal with “evil” flippers. The rules just need to be enforced).

Continuing with the “boogeyman” approach, last week’s Fall Economic Statement found another easy target: those awful short-term rental owners who must be dealt with through the tax system by stomping all over them. Yes, I know, those horrible short-term rental owners cause problems in communities with big parties from their renters, and they suck up the supply of otherwise available properties that could be rented long-term.  So, to “incentivize” – ‘er punish – such owners who rent out their properties in a municipality that prohibits short-term rentals, the government proposes denying tax deductions related to their properties.

Once again, the short-term rental proposal needs to be better thought-out, or it will set a dangerous precedent of taxing business owners on their gross income rather than their net profits.  Does this likely encourage property owners to rent their property long-term, especially when most provinces have landlord / tenant legislation that is very sympathetic to tenants who are behind in their rent? It’s complicated and very time-consuming for a landlord to evict such tenants. Many short-term rental owners rent their properties in such a fashion to provide alternatives to tourists from costly hotels, to provide much-needed income or avoid the ramifications of heavily slated provincial tenancy laws.  In other words, they are not all “evil” or “boogeymen” but are responding to market forces. They are trying to make a living in the best way they know how and to protect their properties.

From a tax perspective, this short-term rental proposal can push people into simply not reporting their income if they appreciate that the marginal tax rate on such income can be excessive and truly punishing.  Not good. Our tax system and policies need to encourage people to report their income and not encourage them to engage in tax evasion.

Instead of attacking “boogeymen” – an approach that is overly simplistic and very political since such simplistic ideas are put forward to try to attract votes from a sympathetic audience – a better approach to dealing with the ever-challenging housing availability and affordability issues is to engage in ever ongoing policy discussions with representatives from all of the above disciplines outlined in the opening paragraph.  Proper policy responses could then be developed, and policy tools deployed for the benefit of all Canadians.

Unfortunately, in today’s world of hyper-politics, I’m likely dreaming.  Despite all its obvious failings, the “boogeyman” approach is much simpler and quicker to deploy.

In the meantime, stay safe out there.  There’s a housing “boogeyman” ready to jump on you.  But I suppose I should feel safer with all the taxation responses, including the short-term rental proposal.

 

One Comment About Leadership – “Culture Eats Strategy For Breakfast”

 

As a business leader, I know the importance of strategy.  And by that, I don’t mean your strategy is to make profits.  Don’t get me wrong, making good profits is essential – no profits, no business – but it is not usually the driver / strategy of a business.

Have you ever worked for a company that you thoroughly enjoyed?  Why did you enjoy the experience?  Was it the work?  The atmosphere?  The people?  The approach to life?  How the business treated its teammates, clients, suppliers and the community?  If you answered, “all of the above,” you most likely experienced a great culture.

The famous management guru Peter Drucker is attributed (although some say wrongly) to having said “culture eats strategy for breakfast.”  What does that mean?  To me, it has always meant that you can have a great strategy / business plan with great financial projections, target clients, etc. But if your business / company culture is lacking, then the strategy means nothing.  No one will want to work for or with you, and you’ll find that implementing your strategy is difficult and sometimes impossible.

In my view, creating a good culture starts with leadership. But leaders need to appreciate they only provide one voice.

How do you create a good culture?  Good question.  And easier said than done.  There are many articles on this topic. It starts with figuring out “why” your organization / business exists.  “What is your why?” Simon Sinek says in his famous TED talk and book.  If your team believes in your organization’s “why,” then you have the seeds to build a good culture.

A good short article by Forbes on this subject is here.  Leaders, take the time to think about the importance of culture and work on building a great one for your organization.  You don’t want your business’ strategy eaten for breakfast!

 

One Comment About Economics and Politics: The Canadian Fall Economic Update – Public Debt Charges

 

The Fall Economic Update disclosed several economic projections.  While the government went out of its way to try and put lipstick on a pig, suffice it to say that Canada’s financial situation is dire.  As the eminent economist Jack Mintz, wrote in the National Post after the release of the update:

Canada may not be broken but the federal government is all but broke and is clearly running out of steam. With a weak economy growing only a little faster than population, there is not a lot of spending room left, not unless deficits and debts are cranked up again. As it is, debt as share of GDP jumps from 41.7 per cent in fiscal year 2022/23 to 42.4 per cent in 2023/24. So much for the fiscal anchors we were promised… As Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” With growing public debt charges, expenditures are rising 13.6 per cent over the next three years, faster than revenues, which are forecast to grow only 12.2 per cent. Much of this spending growth is due to interest payments that are rising by almost a half to $53 billion in 2025/26. That is a ton of money — many tons of money — that could have gone to health care, defence or even, yes, general tax cuts. Instead, we are filling the pockets of Canadian and foreign investors who find Canadian bonds very attractive at the interest rates they’re currently paying.

That’s a powerful summary. For those who want to look at the projections and estimates of Canada’s estimated public debt charges, take a look at page 82 here.

Canada needs to get its spending in line with significant expenditure cuts.  Now.

 

Bonus Comment – Quote From Jack Welch – the famous ex-CEO of GE – About the Importance of Culture

 

“No company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it.”

 

Yep, totally agree!

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