April 7, 2022
Canadian Diversified Financials
Potential implications from the 2022 Canada Federal Budget
Our view: Regarding housing/mortgage changes, ultimately we believe the measures are unlikely to effectively address housing affordability issues. Announced housing/mortgage measures were largely as expected, but certain measures the Liberal Party previously indicated were being considered were not included (e.g., $1.25MM maximum home price for insured mortgages vs. $1MM currently). Of note, not all measures would cool housing activity, but arguably are stimulative (e.g., Home Savings Account). Given housing supply is largely influenced at the municipal and Provincial level, it's unclear if the Federal Government measures will be successful in stimulating the required new supply to improve housing affordability, particularly given the Federal Government is targeting high levels of immigration in the next few years with additional housing demand from international students, temporary foreign workers, etc. As well, the foreign buyer ban has numerous exemptions that we believe are likely to limit its effectiveness. On bank/insurer taxes, notably P&C insurers were not included (IFC, DFY), while HCG and EQB are impacted by the 1.5% tax increase. We forecast run-rate EBT of ~$500MM for EQB post-Concentra Bank acquisition, resulting in a ~2% impact to our 2023 EPS forecast and we forecast ~ $300MM EBT for HCG in 2022, with a~2% impact to our 2022 EPS forecast.
2022 Canada Federal Budget impacts for Canadian Diversified Financials:
• Housing/Mortgage-related:
2-year ban on foreign commercial enterprises and people who are not Canadian citizens or
permanent residents from acquiring non-recreational residential property. Exemptions include refugees; people authorized to come to Canada under emergency travel while fleeing international crises; international students on the path to permanent residency in certain circumstances; and individuals on work permits who are residing in Canada.
Anti-flipping tax - the sale of a property held for less than 12-months would see any gain subject to full taxation as business income with exemptions for things like death, disability, birth of a child, new job or divorce and apply to homes sold on or after January 1, 2023.
Assignment tax - All assignment sales of newly constructed or substantially renovated residential housing will be taxable for GST/HST purposes, effective May 7, 2022.
Anti-money laundering and anti-terrorist financing requirements to be extended to any business conducting mortgage lending in Canada (not just financial institutions like banks) with the change to be implemented in the next year.
Tax-Free First Home Savings Account - first-time home buyers can save up to $40,000 ($8,000/year contribution limit starting in 2023) tax free, with contributions tax-deductible and withdrawals used to buy a first home also non-taxable.
First-Time Home Buyers' Tax Credit doubled to $10,000 for homes purchased in 2022 or later.
Try to get the Provinces to implement a Home Buyers' Bill of Rights, including things like a ban on blind bidding for home purchases; a legal right to a home inspection and ensuring transparency on
the history of sales prices on title searches.
Federal review of housing and the role that large corporate players have on renters and homeowners, which could see changes to the tax treatment of large corporate players that invest in residential real estate. Details of the review will be released later this year and potential early actions could be announced by the end of the year.
Higher taxes for banks and life insurers: (1) one-time 15% tax on taxable income >$1B in 2021, paid equally over 5 years; and (2) a permanent 1.5% tax increase on taxable income >$100MM.
RBC Capital Markets is acting as financial advisor to Equitable Bank, the wholly owned subsidiary of Equitable Group Inc. in respect of an agreement to acquire a majority interest in Concentra Bank, as announced in the press on February 7th, 2022.