Month: June 2015

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1 Jun

Overtaxing the Rich – a great allegory!


Posted by: Michael James

The nice thing about an election year that’s accompanied by federal budget surpluses is that it’s fertile ground for tax cuts – and both the Conservatives and Liberals have promised that tax savings are on the way. But who should really benefit from tax cuts? While it might not seem politically correct to suggest that the rich should get the lion’s share of tax breaks, let me share a story that I first shared many years ago that provides food for thought here.

The cost of dinner

Each and every day, 10 men go to a restaurant for dinner together. The bill for all 10 comes to $100 each day. If the bill were paid the way we pay our taxes, the first four would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The 10th man – the richest – would pay $59. Although the 10 men didn’t share the bill equally, they all seemed content enough with the arrangement – until the restaurant owner threw them a curve.

“You’re all very good customers,” the owner said, “so I’m going to reduce the cost of your daily meal by $20. I’m going to charge you just $80 in total.” The 10 men looked at each other and seemed genuinely surprised, but quite happy about the news.

The first four men, of course, are unaffected because they weren’t paying anything for their meals anyway. They’ll still eat for free. The big question is how to divvy up the $20 in savings among the remaining six in a way that’s fair for each of them. They realized that $20 divided by six is $3.33, but if they subtract that amount from each person’s share, then the fifth and sixth men would end up being paid to eat their meals. The restaurant owner suggested that it would be fair to reduce each person’s bill by roughly the same percentage, and he proceeded to work out the amounts that each should pay.

The results? The fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $14, leaving the 10th man with a bill of $50 instead of $59. Outside the restaurant, the men began to compare their savings. “I only got one dollar out of the $20,” said the sixth man, pointing to the 10th man, “and he got $9!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too! It’s not fair that he got nine times more than me!” “That’s true,” shouted the seventh man. “Why should he get back $9 when I only got $2? The rich get all the breaks!” “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine outraged men surrounded the 10th and brutally assaulted him. The next day, he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they faced a problem that they hadn’t faced before. They were $50 short.

The moral

There are a couple of lessons to be learned here. The first is an observation from my wife: If the 10 individuals had been women, they probably would have figured things out. But in all seriousness, I’m going to suggest that the approach taken by the restaurant owner in the story is exactly the right approach to divvying up tax cuts. It’s how our system should work. The people who pay the highest taxes should get the greatest relief from a tax cut, in absolute dollars.

The fact is, if you overtax the rich, they just might not show up for dinner next time. After all, there are plenty of good restaurants around the world.

This story is relevant today because both the Conservatives and the Liberals have proposed to cut taxes – in different ways. The Liberals have said that they would offer no tax cuts to the rich, but would instead increase the tax burden on the highest earners. The problem with this, of course, is that pushing any taxpayer’s marginal tax rate to 50 per cent or higher (which would be the case for many Canadians, particularly in provinces that also have taken steps to increase the marginal tax rate for the highest earners) will absolutely cause those folks to explore new ways to bring the tax burden down. And in the end, it may drive some to leave.

Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.

1 Jun

Timeless Recap – IRD Penalties – why take the risk? Talk to a Broker….


Posted by: Michael James

I see this time and time again.

Clients have opted for a fixed rate mortgage with their bank – a chartered bank – and they find out the ‘great’ rate they signed up for comes with a massive curveball!

IRD – Interest Rate Differential – get to know this term.  It is scary.

To get the market rate received, the bank gave you a ‘discount’ off their posted rate.

This posted rate is used in their interest calculations on full pre-payment.

Your 5 yr fixed at 2.99% or 3.09% had a discount of 1.8%-2.15% (from 4.79, 5.09 or 5.24%).

At the 3 yr mark, the posted rate could be 3.44% is deducted from the posted rates at the time of your mortgage.

The applicable posted rate less this 3 yr rate (or 1, or 2 or 4 as applicable) can generate a rate differential of 1.35% to 1.80% times your mortgage balance times the time remaining.

Example: 3.09% Big Bank fixed needs to be ‘broken’ after 2 years for whatever valid reason.

Balance $500,000 x 3 years (36mos/12) X 2.15% rate differential = $ 32,250 penalty due.

A broker channel lender with whom I work with – the penalty would be 3 months interest – as they don’t have the posted rate model.  Penalty = 500,000 x 3.09%/12 x 3 = $ 3862.50 penalty due.


Did you see the difference?

Broker Penalty : $3862.50

BIG Bank Penalty: $32,250

Which one would you prefer to pay?

Why not consider using a mortgage broker and save yourself down the line!

It is $28,000 question!


Yours in Mortgages,

Michael James

1 Jun

New CMHC Stats – Mortgage Broker market share – what you waiting for?


Posted by: Michael James

BREAKING NEWS – New CMHC Stats show Mortgage Brokers are AWESOME

Today the Canadian Mortgage and Housing Corporation (CMHC) released their2015 Mortgage Consumer Survey.

LOTS of great information but here are   some key stats which once again shows that the majority of first-time buyers in Canada are now using mortgage brokers!

Mortgage Broker Market Share by Segment:

• Homebuyers (first-time and repeat) (49%) are two times more likely to use the services of a broker than are homeowners (renewing or refinancing) (24%).

• Mortgage broker market share is trending upwards for most market segments. This is particularly evident among repeat buyers where broker market share has increased from 32% in 2012 to 42% in 2015.

• Among first-time buyers, broker market share has reached 55% compared to 48% in 2014.

• Broker share among renewers has remained stable at around 21%.

To read the complete CMHC survey, click HERE.

If the above trend continues, watch for these numbers to GROW another 10 to 20 percentage points over the next three years. This is INCREDIBLE!