It’s a bit of a shocker to see the NDP surge so much in the opinion polls as the federal election heads down the home stretch. And here I was thinking it was a master stroke on the part of  the Conservatives, the party of lower taxes and spending, to trigger an election during tax-return season. So much for voters — with tax burdens fresh in their minds – delivering the upside surprise to the Conservatives.

Instead, it’s the NDP who are on their way to scoring the upside surprise. Even if Liberal and Conservative guns now turn toward the NDP and take some of the shine off, the socialists bandwagon seems headed toward a major gain in Parliamentary seats. What are the implications?

Looking at federal elections back to the early 1970s, the Canadian dollar usually takes a hit as signs mount that the NDP will end up with an influential position in the government. So far, the loonie has maintained its lofty perch above $1.05 (U.S.) — but that could change.

 Warns BMO Capital Markets chief economist Doug Porter: “While the market has all but ignored the election, we could see a significant shift next Monday if these polls are remotely accurate.” So if you have been averaging into the U.S. dollar like me, it might be time for another deposit.

If the NDP do come close to capturing 100 seats in Parliament, as currently projected, their policies will more likely be enacted into law as political parties strike deals to share power. So what could be in the pipeline for Canadians? Here are the NDP’s current election promises:

NDP promises

• double the size of the Canada Pension Plan; allow investing of savings into pensions
• cap credit card interest rates and regulate transaction fees
• extra $700 million annually for the federal Guaranteed Income Supplement
• eliminate the deficit by 2014-2015
• cut small-business tax from 11% to 9% and return corporate tax to 2008 level
• create credit for employers of up to $4,500 for new hires
• extend Accelerated Capital Costs Allowance to 2015
• bring troops home from Afghanistan
• make pensioners and workers on disability a priority when employers go under
• forgivable loan program to cover costs of renovating home so aging relative can move in
• allow Canadians to take up to six months leave to care for a relative
• caregiver benefit to help low-and middle-income families caring for aging relatives

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A lot of people seem to think house prices in Canada are in for a big tumble. Garth Turner has long hammered on this theme, but the mainstream media seems to be picking up on it these days too — for example,  Joe Castaldo’s article.

But nobody can really say for certain what lies ahead when it comes to predicting real world events, in my opinion. In the stock market, the top stock pickers get it right only 60% of the time. And many studies show that people who try to time the stock market cannot do it consistently.

What works in the stock market is investing for the long term, diversifying and rebalancing. This would likely be a better approach to adopt in the housing market rather than trying to dodge an expected plunge in house prices by selling one’s house and renting.

Buying and holding for the long term makes even more sense in the housing market because the transaction costs of buying and selling a house are greater – in absolute and percentage terms – than the stock market. And of course, the first few years of paying off a mortgage go mostly toward interest.

The long-term perspective works in stocks because they recover from the downturns and go on to higher levels. That’s also been the pattern in the housing market over the decades and there is little reason to think it will come to an end — or that if house prices drop, they will stay down forever.

One could also consider coping with house-price fluctuations by diversifying and rebalancing. If all of your net worth is in your house, you could consider trimming back on home-improvement projects and build up other assets such as stocks, bonds or GICs. Similarly, you could pull back on aggressively paying down the mortgage and redirect funds into non-real estate assets.

If you are a first-time buyer, the risk of falling house prices lends even more credence to the first rule of personal finance, which is to live below your means. Avoid buying the house at the outer limit of your budget, and direct the income saved on each paycheque toward accumulating a reserve that hedges risk in the housing market.

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According to H&R Block data, the medical expense tax credit (METC) is the most overlooked part of the tax return. People often fail to claim all that is due to them on Lines 330 and 331.

How does the METC work?

Taxpayers claim it on eligible medical expenses exceeding 3% of their net income (or, $2024, if less). The credit is 15% at the federal level. In Ontario, it’s 6.05% — so, someone in that province gets a total refund of 21.05%.

To illustrate, if Jane lives in Thunder Bay and has net income of $30,000 with $1,900 in medical expenses, her METC is $210.50. She gets this amount by multiplying $30,000 x 0.03 = $900 and subtracting the result from $1,900 in medical expenses — leaving $1,000 in eligible expenses. Then she multiplies 21.05% x $1,000 = $210.50.

How might the METC be optimized?

There are several ways the METC can be optimized. Let’s look at two in this post. In the next post, we’ll look at two more.

1. One family member should claim for the whole family

The Income Tax Act allows taxpayers to claim for themselves, their spouse and their children. This option should be exercised by the spouse with the lower net income if he or she has enough taxes to offset in the current year (the credit is non-refundable). An example illustrates.

Jane’s husband has net income $50,000. He and the kids have medical expenses of $3,500. If Bob and Jane claim separately, her METC would be $210.50 (as calculated above) and Bob’s and the kids would be $421, for a total METC of $630.50.

If Jane instead claims for everyone, the METC would be greater because Bob’s and the kid’s medical expenses would not be reduced by 3% of Bob’s net income. Moreover, Jane’s 3% of net income is the lower threshold.

She subtracts her threshold of $900 from $5,400 ($1,900+$3,500) in family medical expenses to obtain $4,500 in eligible expenses. Applying 21.05% to this amount, yields $947.25, considerably more than filing separately (and also more than if Bob filed for everyone).

2. Claim for extended family members on Line 331

If you are paying medical expenses for an extended family member dependant on you (e.g. parent, uncle, nephew), you can file for a METC on Line 331. The medical expenses have to first be reduced by 3% (or $2,024, if less) of the relative’s net income.

You can only claim up to $10,000. If you have enough expenses to exceed this limit, you can have a relative share the expenses (and they claim for METC on their return).

METC Calculator

A Medical Expense Tax Credit calculator can be found at this dentist’s website. I’ll look at two other ways to optimize the METC in my next post.

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During the first quarter of 2011, the One-Minute Portfolio (OMP) increased 3.6%, due to continuing strength in equities. The total return on the bond component was flat, with price declines offsetting interest payments.

The OMP is made up of two exchange-traded funds (ETFs): the iShares S&P/TSX 60 Index Fund (XIU) and the iShares Canadian Bond Index Fund (XBB). The weights are adjusted annually according to a rule described in the annual updates. They currently stand at 70% for the equity ETF and 30% for the bond ETF.

The average annual compound return on the OMP is 10.7% since inception in early 2003. This figure is based on total return data from the iShares website and the weighting patterns described in the annual updates. For more details on the OMP, see the annual updates at the beginning of each year. The last appeared on Jan. 4, 2011.

The Jan. 4, 2011 update mentioned that the OMP may be revised to include foreign diversification. My apologies for not posting on this topic as promised – it’s been a busy time (now home schooling my 7-year-old, among other things). The topic remains under consideration, and a blog post will appear, hopefully in the near future.

Note:  The average annual rate of return cited for the OMP in recent articles was estimated. The figure of 10.7% cited in this post is  based on actual data going back to 2003. 

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Investors are being warned about accounting changes that publicly traded Canadian companies need to make in 2011.

They have to begin compiling their financial statements according to International Financial Reporting Standards (IFRS) instead of Canadian Generally Accepted Accounting Principles (GAAP). And the transition will alter accounting figures and financial ratios — as a report from the Certified General Accountants Association of Canada (CGA-Canada) highlights.

“Investors and their advisors need to be particularly vigilant during this transition phase,” cautions Rock Lefebvre, Vice-President, Research and Standards, CGA-Canada. “Comparing financial ratios under the two reporting regimes isn’t straightforward.”

Cash-flow analysis may be a much more reliable assessment tool, he adds.

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We can’t all be the sharpest tool in the workshop. The Gallery of Career-Limiting Moves has several accounts of people who unwittingly showed themselves the door at their place of work. Here’s a couple more that illustrate how modern technology can endanger the employment status of those who aren’t fully cognizant of the pitfalls.

Storing your sex tapes and whatnot on company computers

Thirty-something Steve Rowe was a computer whiz employed for over a decade as an infrastructure analyst at the Sheridan College Institute of Technology and Advanced Learning. As public documents filed by the Ontario Labour Arbitration Awards board report, he took control of a spare computer at the college, and used it to download copyrighted materials such as movies, music, games and pornographic videos. He also granted access to the stored material to numerous colleagues, relatives and friends — even though the computer was connected to the college’s computer network (which contained highly sensitive records and required a security clearance to access).

After a decade or so of operating like “a bootleg entertainment dealer,” a third-party audit uncovered Rowe’s activities (including online chats with his girlfriend about their sexual encounters on college premises). The union took his termination to the Ontario Labour Arbitration Awards board but lost in a decision handed down in December.

Threatening your boss on Facebook

Comments on social media website Facebook are what got an employee of a B.C. auto detailer and accessory shop dismissed from his job, according to filings from the British Columbia Labour Relations Board. The employee was one of the organizers of a union that had just been certified at the shop, and the consequence apparently was some friction with his manager.

For a month, the employee vented his feelings about the manager on Facebook, publishing what the manager deemed threatening and violent comments — including references to serial killers and revenge plots. This was followed by homophobic and derogatory comments, and finally attacks on the reputation of his employer. The labour relations board upheld his firing for cause in an October ruling.

Hat tip to Northern Exposure blog

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