The Bank of Canada announced last April that it would hold the overnight interest rate at 5% for the sixth consecutive time, and continue to normalize its balance sheet. Governor Macklem confirmed that the inflation rate is moving in the right direction, labour markets are easing, and wage pressures appear to be dissipating. The Bank has revised its forecast, expecting stronger GDP growth in the first half of 2024, but a slower economy in 2025. Inflation is expected to align with the Bank's 2% target by 2025.
Governor Macklem expressed that while progress is being made, the Bank needs to see sustained results before making decisions. According to forecasts, interest rates may be cut in June, but Macklem emphasized that recent declines in core inflation are still very recent and may not be a long-term trend. Despite easing inflation, officials remain cautious due to remaining risks.
March's Consumer Price Index (CPI) report revealed an expected 2.9% year-over-year increase. Gasoline prices drove this growth, while core inflation slowed to 2.8%. Upward pressure on rent and shelter prices continued as a result of high interest rates. Housing costs, specifically shelter, continue to be the main driver of inflation, accounting for the largest share of the overall inflation rate. Excluding shelter costs, inflation sits at 1.5%, which is below the Bank of Canada's 2% target. While Canada's inflation is approaching the 2% target, setbacks are still possible, as seen in rising gasoline prices. According to Chief Economist Dr. Sherry Cooper, the Bank will most likely start rate cuts in June if the April inflation report reflects the data from March.
Federal Budget Proposals
The 2024 Federal Budget has introduced a series of measures that will impact the Canadian housing market if approved. One of the main sections in Budget 2024 includes the housing crisis in Canada and proposes some plans to address this issue. Read below for further details!
Home Buyer Plan Limit Increase
The Canadian Government proposed changes to the Home Buyers’ Plan in an effort to make homeownership more accessible for first-time homebuyers. The Home Buyers' Plan allows first-time homebuyers to make tax-free withdrawals from their RRSP to help finance the down payment on a home. If the withdrawal is repaid within a 15-year time frame, then it will not be taxable. The 2024 federal budget proposes to raise the limit of the Home Buyers' Plan withdrawal amount from $35,000 to $60,000. The budget also proposes to extend the repayment grace period from two to five years.
Capital Gains Tax Increase
Capital gains refer to the profit made from selling an investment or property whereas capital loss is a decrease in value resulting in a financial loss when sold. Investment and property types include stocks, bonds, shares in mutual funds, rental properties, cottages, and business equipment. Capital gains are taxable in Canada, meaning that it is treated as income during the year an investment or property was sold.
The Canadian federal government has proposed an increase in taxes on capital gains, intending to make the tax system more fair. The plan is to increase the inclusion rate on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and trusts from one-half to two-thirds. This change would mean that 66.67% of capital gains would be taxed as income, up from 50% previously. This tax only applies to secondary properties, such as cottages, rentals, or investment properties, and does not affect your primary residence.
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