Weekly Market Update August 6, 2019

What happened?

• North American and global equities suffered significant losses last week. The NASDAQ gave back nearly 4%, while the MSCI’s All Country World Index (ACWI), Dow and S&P 500 lost around 3%. The TSX performed better than most, but still lost 1½ percent.

  • Much of the losses in North America can be attributed to the Federal Reserve’s decision to cut its benchmark interest rate by ¼ of a point and its signal that additional cuts in coming quarters are not as likely as originally thought.

    • Since the cut had already been priced into the market, the delay or elimination of future cuts lessened corporate prospects and drove share prices downward. https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm

• Another, and perhaps more significant, contributor to the troubles with equities around the world and locally is the continued trade tensions between the world’s two largest economies, the U.S. and China.

  • President Trump issued additional threats and is planning to impose additional tariffs on Chinese imports. The restrictions in trade reduce overall economic activity, and not just for the two countries directly involved. For example, demand for raw materials and component parts is lowered if the end users require less of the finished products. Also, the tariffs increase costs to buyers (i.e. consumers) when the tariffs are sent to the Treasury. https://www.bloomberg.com/news/articles/2019-08-01/trump-ratchets-up-trade-war-with-new-tariffs-on-chinese-imports

What’s ahead for this week?

In Canada, the short trading week due to Ontario’s Civic Holiday closing of the TSX has a light economic announcement calendar with June’s building permits and July’s housing starts and employment report.

In the U.S., a similarly light week is planned with June’s wholesale inventory levels and July’s Producer Price Index (PPI).

Weekly Market Update July 29, 2019

What happened last week?

With our dollar as the lone exception, it was an all-green week. Since most Canadian investors have their sharpest focus on the performance on equities, last week did not disappoint, unless you were also only focused on Canadian stocks.

• Renewed efforts to end the U.S./China trade disputes have provided optimism that economic activity between the two nations would resume its former healthy levels.

• The corporate earnings season, particularly in the U.S., has proved to be better-than-expected. Nearly half the firms in the S&P 500 have reported, and 77% of them have beat profit expectations, and their stock prices reflect this performance. Google led the way with a 10% price increase after their earnings announcement. https://www.barrons.com/articles/earnings-season-so-far-revenue-beats-meet-low-expectations-51564196201

• American GDP results show that their economy was performing better than thought, but not so well to change the anticipated rate cut by the Federal Reserve. A rate cut this week will make borrowing cheaper for all firms, and it is expected to lead to economic expansion, higher profits and, ultimately, greater equity values. https://www.theglobeandmail.com/business/article-us-federal-reserve-interest-rate-cut-over-rising-trade-war-risks/

• Last week here at home, the TSX continued its slow, steady upward climb, approximating the results of the Dow, but not nearly as impressive as the S&P 500’s new record high, and the NASDAQ staying very close to its all-time high. The TSX was helped along by the price of oil, and the consumer staples and technology sectors.

What’s ahead for this week?

• In Canada, the results of our economic health and growth will be released through May’s Gross Domestic Product (GDP), and June’s international trade, numbers.

• In the U.S., the long-awaited Federal Reserve interest rate decision will finally occur on Wednesday at 2 pm Eastern. Also, personal income and spending, construction spending, durable goods orders, trade balance for June, the employment report for July will be released.

Weekly Market Update July 22, 2019

What happened?    

·  It was a difficult week for equities in North America.  Although the three major American indices touched new all-time highs, equity indices and the Canadian dollar finished lower.

o  The price of oil suffered a one-week drop of nearly 8%, due to higher U.S. reserves and increased Russian production levels. Despite the heavy loss last week of $4.50/barrel for West Texas Intermediate, the price of oil has surged over 22% in 2019.  Only the NASDAQ has performed better this year.

§  The Energy sector of the TSX dragged the overall index downward. Thankfully, the overall loss was negligible at one-hundredth of a percent, far less than the losses suffered in the U.S.

o  President Trump continued to threaten the hoped-for trade deal between the U.S. and China, and his remarks reduced the optimism for a conclusion to the dispute.

o  Two additional contributors to the U.S. stock market decline is the diminished corporate results that are beginning to be reported for the most recent quarter and some new doubt that the Federal Reserve may not cut its benchmark rate in July. https://www.wsj.com/articles/why-weak-corporate-earnings-dont-signal-a-weak-economy-11563631200

·      Recent volatility from political tensions, dubious corporate performance, monetary policy and strengthening economic growth should remind all investors to keep index performance in perspective.  The value, predictability, liquidity and risk levels of an individual’s portfolio are far more important than the overall market or any index’s short-term gain or loss.

What’s ahead for this week?

·      In Canada, in will be a light week for economic releases as the quarterly earnings season builds on both sides of the border. Wholesale trade figure for May the sole indicator of note scheduled for release.

·      In the U.S., new and existing home sales and durable goods orders for June will be released along with quarterly results for almost 150 firms in the S&P 500 and 10 of the Dow’s 30 firms.

Snowbirds and U.S. Tax

Executive Summary

Politicians are constantly searching for new tax revenue. Not wanting to upset national residents and ultimately voters, officials often include non-voting, foreign owners of domestic property as a key component to increasing tax revenue. 
Canadian Snowbirds who own real estate in the U.S. are prime candidates for paying increased taxes. Since the taxation rules are complicated and can change frequently, it is vital to stay informed and in-the-know.
 

What you Need to Know

In order to be exempt from filing IRS forms or a U.S. tax return, three conditions must be met:
1.    You do not earn any U.S. source income (interest, dividends, capital gains, rent) AND
2.    You are not physically present in the U.S. for more than 182 days AND
3.    You score less than 183 on the Substantial Presence Test:

To calculate your Substantial Presence score add together

• Number of days spent in the U.S. in the current tax year
• One-third of the days spent in the U.S. from the prior tax year
• One-sixth of the days spent in the U.S. the year prior to that:
  • An example: 
    • 2014: Days in U.S. = 140
    • 2013: Days in U.S. = 93
    • 2012: Days in U.S. = 120

         Add together      140 (days spent in 2014) 
                                    + 31 (1/3 of 93 days spent in 2013) 
                                    + 20 (1/6 of 120 days spent in 2012) 
                                     191 (Your Substantial Presence Score)  

These calculations can be further complicated by the fact that the IRS follows the calendar year, and typically Snowbirds stay six to eight weeks in one year and then another eight weeks or more in January, February and March of the following year.  

Additionally, it is important to understand the IRS’ definition of ‘day.’ The IRS counts any time spent during a calendar day, as a full day.  If, for example, you cross into the U.S. at 11:55 pm, and return ten minutes later at 12:05am, the IRS would consider this two full days since you spent time during two different calendar days, even though it was only ten minutes in total time!

Also important to note that the IRS includes all of your visits to the U.S. throughout the year, not just your winter holiday.  Daytrips for shopping or sporting events, for example, must also be included in your Substantial Presence calculations and determination of total days in the U.S.

If you frequently travel to and from the U.S, you may want to keep a small journal in your car where you can write down the date, time and occupants for each time you enter and exit the United States.  Currently, a credible journal is sufficient proof for the IRS.

Point #1, above, is not as straight-forward as it sounds.  If the income is ‘rent’, then IRS forms, and likely a 1040-NR, are necessary.  

Interest income is ‘zero-rated’ for Canadians, so technically the income should be declared, but the tax rate is zero, so no U.S. tax is levied.  

U.S. dividends are taxed at a flat rate of 15% for Canadians, and if the proper filings are made from your broker (either Canadian or U.S. based) to the company paying the dividends, then the 15% should be withheld, and no further declarations in the U.S. is required.  This withholding should be verified and included on Canadian tax filings.

If the capital gain is the sale of the U.S. real estate, it is best to consult a Canadian-based U.S. tax expert before you contemplate selling to anticipate the necessary steps and filings to repatriate your capital back to Canada.  

Further complicating the declaration of income is converting U.S. payments to Canadian dollars.  The requirement is that the Bank of Canada exchange rate for the date of the transaction be used.  If multiple payments occur, an average annual exchange rate is acceptable to CRA and can be found at http://www.bankofcanada.ca/rates/exchange/annual-average-exchange-rates/ 

Some Key Factors to Know

•    Canadians who earn U.S. source income subject to U.S. tax must file a U.S. tax return using IRS form 1040NR (non-resident)
•    When U.S. property is sold by a foreign owner, the buyer is required by law to withhold ten percent of the purchase price and remit it to the IRS when the transaction is concluded (i.e. ‘closed’))

The buyer’s lawyer when releasing funds withholds this money, because if it is overlooked,      the IRS could require the buyer or the buyer’s lawyer to remit the 10% while any tax implications are calculated
o    Filing a 8288-B can reduce this 10% withholding amount all the way down to the anticipated tax amount, even if the tax is zero

• To file an 8288-B, a Tax Identification Number (TIN) like a U.S. Social Security Number or Canadian Social Insurance Number is needed. Obtaining a TIN requires 6 to 8 weeks, and must be in-hand prior to contract signing to facilitate the reduction of the 10% withholding

•    If a Canadian stays in the U.S. for 183 days or more, he or she must file a full return or a non-resident return
•    If your Substantial Presence Score is 183 or higher, file an 8840 form to prove that you have a ‘closer connection’ to Canada, since any person can only have one official home country at any given time it is usually simplest for “Canadians” to be tax residents of Canada

Bottom Line

If you are a Snowbird or travel abroad often or for extended periods, you should consider and know the tax implications of your travel plans. In the U.S. details change often. Staying in touch with your Advisor will help you understand these issues.  Ultimately, an accountant with a specialty in cross-border tax will provide the advice you require tailored to your situation. Please contact me with any questions about the guidelines listed above.