Blessed by the Potato

A little while ago Rob Carrick idly wondered on his facebook page/discussion group if the home buyer’s plan (HBP) was a good idea. In case you’re not aware, the HBP is one of the few ways you can take money out of your RRSP without paying tax on it: you can pull up to $25,000 out as a first-time buyer, and repay it over the next 15 years. The HBP primarily accomplishes two things.

1. It lets people contribute to their long-term (retirement) savings with an “out” to use those funds for a down payment on a house/condo. This way they can save for the future without having to plan what will be house funds and what will be retirement funds.

2. It lets people get a tax refund on their down payment that they can also use on the house right away, effectively borrowing from their future selves. In the short term, it’s an incentive to buy.

On top of this, it has a psychological effect: home ownership and post-secondary education are the only sanctioned reasons for borrowing from your RRSP. Add how irrational people can be about taxes and tax deductions, and it’s a bit of a sacred cow. In the right light (octarine?) it looks like the government encouraging buyers to reach for as much real estate as they can, using everything at their disposal (including their RRSP).

With TFSAs in place now though the first point is well taken care of by that tax shelter: you can easily throw all your long-term savings in there as a young person, and if you need to raid them for a down payment (or whatever) then you can, even in excess of $25,000. Plus it’s already set up to be indexed to inflation so we won’t have to worry about future whining that the HBP isn’t big enough. As for point two, I really don’t think we need any more tax incentives or holiness attached to housing, so doing away with the HBP in favour of encouraging TFSA use would suit my politics just fine.

To be fair, this may need a few years for transition, and would present a bit of a savings conundrum to people who get employer RRSP top-ups, but I find it hard to feel that’s a major flaw in my plan. Let’s simplify the RRSP that one extra step, and phase out the HBP.

I did not have the chance to follow the Ontario election in depth, and haven’t commented at all on it. Now that it’s over, there isn’t much to say.

Except one thing: Hudak’s “million jobs plan” was shown fairly early on to be based on flawed math. This was an excellent opportunity for him to take the race* by changing his platform based on the data and corrected information. Not only could he then have run on a sounder plan (though in the end that plan would likely have looked very much like the other parties’), but he could have distanced the provincial party from the federal cons and their well-known disdain for data.

Instead, the message was “well, in my heart and mind…” [it’s true]. For so long I have had so much trouble relating to conservatives — there is a perfectly valid basis for disagreeing with one another on how we should run the country, what roles the government should play, and whether that should be minimized or optimized based on various value systems and circumstances of the day. But some opinions and plans are so out there that I’m just left shaking my head. And now I know: the disdain for data goes so deep that — Hudak at least — lives in a fantasy world. That or the conspiracy version where he is so interested in appeasing the corporations/lobbyists he truly works for that it doesn’t matter if the thin veneer of reason for playing into their interests comes off, he’s sticking to that flawed plan.

I know the centre and left are far from perfect, and at both the federal and provincial level the Liberals have had their share of scandals and waste, but it’s the lesser evil in my mind. Hopefully Toronto at least has seen enough of reactionary leaps to the right — with Rob Ford, Mike Harris, Harper, and now a glimpse at a near-miss of the Hudak fantasy — to perhaps give us a generation or two of respite from the conservative fantasies.

* – Not that I was rooting for the provincial conservatives — I’m definitely a left-leaning centrist if anything — but as many commenters had said going into the election, with the sentiment against the Liberals and the illogical move by the NDP to trigger the election in the first place over a budget they should have been crowing about, it was his race to lose.

In the comments to the first post on regulating financial advisors someone brought up the issue of regulatory burden: the extra paperwork and delays imposed on businesses. Nicole went so far as to call it “onerous” and “strangling” — and that’s just for the regulation already in place, which we’ve criticized as not providing enough protection.

There are lots of examples of regulatory burden out there, for many stakeholders. I regularly suggest that people go with TD Waterhouse to be able to invest in e-series funds over TD Mutual Funds because of the extra steps and forms needed to fill out and mail in to convert an account and the possible limitations of the KYC forms. I never got my CFP/CSC because it’s just not worth my time to take the courses and exam for what the designations would bring me; if something like that were to be a mandatory requirement to talk to clients about investing and their financial plans that would keep me and several other part-time educators/planners/coaches/DIY-support people out of business.

But a certain amount of form-filling, records-keeping, and education overhead should be expected in any business. The correct amount of regulatory burden is highly unlikely to be zero, and if it brings important consumer protections then that’s a good thing.

However, the way regulations and reporting are structured can have huge impacts on the eventual regulatory burden. Consider for example something I have some experience with: applying for a grant to do some medical research. You could apply to the US National Institutes of Health (NIH) and or to the Canadian Institutes of Health Research (CIHR). In both cases the basic document outlining the experiment you’re looking to fund would be say 13 pages. On top of that you’d have a detailed 5-year budget and a justification for the funds you were seeking, a half-page lay summary for the funding agencies to release to the press or the elected government representatives, and some kind of CV to demonstrate that you had the experience and ability to carry out the research you proposed.

Now both funding agencies take very seriously the protection of research participants and have fairly similar rules and regulations in place for that protection, but the implementation and regulatory burden is night and day in my mind. In Canada, your grant would now basically be complete: CIHR’s protection of research subjects rules are separate from the grant process, and all institutions sign on to it before they can enter a competition. They know that any research is going to be reviewed by a research ethics board that meets their standards, and will get a copy of the approval before releasing funds (if you’re successful in the first place). If the experiment calls for anything terribly out of the ordinary, then it’ll have to be explained in the proposal anyway. Compare this to the US, where the proposal part of the grant submission is almost like an afterthought to the stacks of appendices and tables that have to be filled out — including some that no one really seems to understand (including the NIH help staff I’ve spoken to), where you have to predict the racial breakdown for any proposed study (how many whites, blacks, asians, etc. will you recruit), but then also the “latino/non-latino ethnic breakdown” (how many latino asians vs non-latino asians will you include in your study??). It’s stressful and confusing (Spain and Portugal aren’t included in the countries of origin for people considered hispanic?) and totally bizarre (why do they care about this stuff? Will they really reject my grant over this?). For basically the same mandate and ultimate protection of research subjects, the regulatory burden is quite different between the agencies because of how they approach the problem and where they place the reporting requirements. By having so much paperwork up at the application stage it creates a lot of work for the ~80% of NIH applicants who will not get their grants funded because the scientific component wasn’t competitive enough for the severely limited funds.

Also, some protection comes with virtually no on-going regulatory burden. The Residential Tenancies Act sets out many protections for tenants, but aside from modifying what you can put into a lease there is no paperwork for landlords or tenants to fill out in the regular course of business beyond what you’d need anyway. Indeed, you get some of that for better than free: by standardizing certain terms, responsibilities, and practices they don’t have to be separately negotiated and drawn up in a lease. Everything is handled on an enforcement basis: only after a problem arises does someone end up having paperwork to fill out. Now at that point it can be very onerous (dealing with the LTB is no picnic, especially for landlords), mostly due to the delays involved. But for most people most of the time, it’s reasonably strong regulation with little overhead cost.

So I think that implementing a better model for financial advice and regulation thereof can be done in a way that minimizes the regulatory burden. It’s something that can and should be kept in mind as a new regulatory framework is thought out (especially the implementation aspect), and kept in balance with the benefits.

In the last post we talked about the importance of regulation: to create an environment where a non-expert, without the ability to independently evaluate an expert, can come to trust a complete stranger because of the regulations and mechanisms in place to create and maintain quality and ethics. There are lots of examples of industries and professions with varying degrees of regulation that we can learn from.

Car salesmen are regulated (OMVIC in Ontario). The regulations set some minimum standards for disclosure and how prices can be advertised: it’s not especially strong legislation (for instance, the dealer does not have an obligation to work in the best interest of the customer), but then the general public understands explicitly that the car salesperson sitting across the desk from them is in a sales role. They don’t couch themselves as “transportation advisors”, and if you went to one you would know that they would try to sell you a car (and you would not walk away with a recommendation for a bicycle and transit pass even if those might suit your situation better). They might be able to help you pick a particular car that’s suitable: compact over a truck, but even then you know that if you walk into a Chrysler dealership with a need for something fuel efficient you won’t be driving out in a Prius or Leaf: the best they could do is a 4-cylinder gasser that their dealership sells. To my mind, this is most analogous to the current MFDA designation in the financial sphere, but without the universal, mutual understanding of the sales and commission-driven nature of the role.

Some trade organizations exist more to protect their members and a monopoly than to protect consumers and build trust with the public. Since it’s been a while since I’ve done so, let’s pick on realtors: there are minimal barriers to entry, and no formalized processes to manage conflicts-of-interest (except for those set up at individual brokerage offices). There is a dispute mechanism, but from casually looking at cases and allegations, they seem to take realtor-on-realtor aggro way more seriously than allegations of misleading or mistreating the lay public. In other words, CREA/TREB is not a model I would want to copy: the initial quality standard is not rigourous, there’s no continuous improvement, there’s next to no policing or efforts to maintain the public trust: it appears to be a trade organization out to serve its own interests.

In cases where the decisions are literally life-or-death the regulatory body tends to take a more active role. Medical physicists for instance are responsible for calculating radiation doses in cancer therapy and ensuring that the machines are accurately delivering the doses prescribed. Over-dosing can kill through radiation effects, underdosing can allow cancer to proliferate. The Canadian College of Physicists in Medicine requires a graduate degree in one of several related fields, a fellowship program (education), examination, continuing education, periodic re-certification, and practice reviews.

Banking, at least the deposit-taking part, is a highly regulated industry. Not just anyone can rent out a space with marble pillars and a vault and call themselves a bank. Because trust is essential to preventing a run on the banks, a government-backed insurance scheme (CDIC) is in place to guarantee that if all of the regulations and oversight somehow still manages to fail, depositors will get their money back (up to a limit of $100,000 per account). Now, that’s not to say that a bank won’t ding you with service charges or sell you services you don’t need — they walk a fine but well-defined line of trust and conflicting interests for sales.

Franchises are not something handed down by the government or enshrined in law, yet by building strong brands people know that stopping at McDonald’s or Subway for a meal will provide a fairly uniform meal experience — they can trust that even in a strange city far from home that they’re going to get what they expect. It’s a way of accomplishing the end goal of letting someone with no easy way of independently evaluating quality to walk in off the street and know that they’ll be in good hands.

So what would I like to see? I think good regulation will be stronger and faster* than building up a brand/franchise, though the end result might be better that way as an organization shooting for excellence doesn’t have to play to the lowest common denominator. Either way, I think getting rid of embedded commissions and their inherent conflicts-of-interest and obfuscation is the first step: it’s an uphill battle for education and standards if that basic component of the business model isn’t fixed first. We could follow the UK and Australia in that direction, and it will be interesting to see how their experience plays out over the next few years.

Either way, training and examination requirements at the start, including an ability to explain how fees work, the impact of fees, cash flow planning, and managing behavioural issues. Explaining risk at some level is necessary but is tough because even experts have trouble defining it precisely — perhaps just understanding that there are aspects of risk. Levels or specializations of certification, and an understanding that some situations should be kicked up the chain. Re-examination, auditing of practices, and other systems to keep quality high. And a correction mechanism: some way to feed back new or unresolved problems back through continuing education, to arbitrate disputes, and compensate customers who were wronged.

The regulatory body should ideally be separated from the body that looks to maintain a monopoly or promote the profession so that it can be client-serving and not self-serving. Because it can be confusing as to what the responsibilities of the advisor are (especially if a term like “advisor” is used), someone (who?) should make it clear to the public what the relationship is, possibly disclosed up front (“Hi, I’m a salesperson and I do not have a responsibility to do what’s best for you, just to make my commission and not recommend something egregiously bad. Let’s look at a 7-seater, shall we?”).

Unfortunately I still haven’t had a chance to read the private member’s bill in Ontario so this might all be covered already.

* – from implementation to helping people. It will likely be slower to be crafted and passed in the first place.

Sandi Martin of Spring (the blog) has stormed onto the PF blogosphere. I’ve added her to the blogroll on the side there, but wanted to point you to a few posts in particular.

In my book I recommended TD Waterhouse as the go-to place for new index investors, largely because of their low-cost, easy e-series index funds and because then you’d have a decent brokerage account you were comfortable with when it came time to “graduate” to ETFs. Not long after the book was e-published, a number of other brokerages (e.g., Scotia) came out with free-to-trade ETFs, presenting a competitive alternative to TD Waterhouse. People wrote to me asking if my recommendation had changed, and while I couldn’t be as singular about it, I would still recommend TDW. It was a bit of waffling about simplicity (the list of free-to-trade ETFs is fairly daunting, and misses the usual recommendations), a bit about customer service (which even if you only need it once is still important if you’re a new investor trying to get something going and you don’t even know what it is you’re trying to ask for), and a bit about e-series allowing you to optimize/maximize your investing with monthly savings plans thanks to a low minimum and the ability to invest in arbitrary increments. Sandi managed to articulate this very well in a recent post:

“…you’ll find a lot of reviews that talk about “$9.95 trades” and “great research tools”. Those features just don’t matter […] Your wish list is heavily slanted towards the cost to invest in, hold, and rebalance a portfolio of index funds, and the minimum purchase requirements for regular investment plans. “Ease of use” doesn’t even make the list, and neither does “research and education” or “personal rate of return tracking”…”

Now of course she recommended my book in this post on mutual funds, so that is going to get a link. It’s also a nice, succinct piece on why people should look to boring index investing.

She’s got a series on avoiding “the useless retirement plan” (start here), building off her experiences working at a bank.

And she mentions the deceptive “may” in the HST instructions in this post on the matter. Well we got caught in that same confusing wording, and seeing that others are also having problems with it means its time to write someone to get it fixed. So I wrote an email to my MP and a letter to the CRA (Taxpayer Services Directorate; Canada Revenue Agency; 395 Terminal Avenue; Ottawa, ON K1A 0L5), copied below:

Dear [My MP];

I’m writing you today in regards to some confusing instructions at the Canada Revenue Agency. For small businesses that collect HST, after reaching $3,000 in tax for a fiscal year the Canada Revenue Agency requires quarterly tax installments, rather than annual payments. However, the instructions say:

“If you are an annual filer and your net tax for a fiscal year is $3,000 or more, you may have to make quarterly installment payments throughout the following fiscal year” [emphasis mine] http://www.cra-arc.gc.ca/E/pub/gp/rc4022/rc4022-e.html

That “may” has caused some confusion for business owners and freelancers within my own family, as well as other cases I have recently heard of in the community. The CRA requires quarterly payments once the $3,000 threshold is reached, and does not send notice, instructions, reminders, or a payment schedule. If quarterly installments are not made, they levy interest. Yet the instructions do not make it clear that it is up to the small business to remit quarterly without further instructions — indeed, the “may” suggests that they would not have to remit quarterly unless directed otherwise.

This confusion is exacerbated by the contrast with income taxes, where the CRA does explicitly direct the taxpayer when and how to remit quarterly when they are so required.

I am not asking for the tax law to be changed, but rather for the procedures and instructions to be clarified to prevent this common error from occurring. Two potential solutions that come to mind are:

1. Change the procedure to include a notice period, and have the CRA lay out a schedule for quarterly HST installment payments (as with the income tax).
2. Change the instructions to make it clear that small businesses must remit quarterly, and should not expect advanced direction from the CRA.

Thank you for any help you can offer in fixing this for other small business owners. I want to mention that my own situation has long since been cleared up, so I do not need any personal help with HST. I have sent a similar letter to the Taxpayer Services Directorate of the Canada Revenue Agency.

Sincerely;
[Me]

Please feel free to take from this, put it into your own words, and help make a small change that can save administration work at the CRA and penalty interest and headaches at numerous small businesses.

As an aside, it makes me wonder how apropos it is that the address for suggestions is on terminal avenue…