In the 2023 Fall Economic Update, the Government of Canada announced:
Dividend Received Deduction by Financial Institutions – Exception
The Income Tax Act permits corporations to claim a deduction in respect of dividends received on shares of other corporations resident in Canada. Budget 2023 proposed to deny the dividend received deduction in respect of dividends received by financial institutions on shares that are mark-to-market property.
The 2023 Fall Economic Statement proposes an exception to this measure for dividends received on “taxable preferred shares” (as defined in the Income Tax Act). This exception, along with the rest of the measure, would apply to dividends received on or after January 1, 2024.
So the fears previously expressed that property insurers would stop buying (and maybe even sell! They’re about 12% of the market!) can be laid to rest. Until next time.
Thanks to Assiduous Reader Jason for bringing this to my attention! And thanks to peet for foreshadowing this announcement!
Update, 2024-5-16: See also: https://www.budget.canada.ca/fes-eea/2023/report-rapport/FES-EEA-2023-en.pdf
https://www.theglobeandmail.com/business/article-insurers-preferred-shares-tax-change/
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james,
was this announced today? if so, we may have our answer to why market popped. can you imagine if many had sold and now need to reload??? giddyup
ahh, see the other post.
clearly the culprit
I agree totally with DR. Here’s the answer. And I expect a continued pop in all kinds of preferred. The fall update was announced yesterday.
And this could also explain the fabulous retail buying opportunities we had this past summer and well into fall. These institutions might have been dumping these in anticipation of the change, leaving the retail little guys like us to be the sole buyers.
Again, we build our theories based on attempts to fit the puzzle and this one does a nice job!
it absolutely does.
and for me, i have long argued that entering a sweet spot of say 3.5%-4% give or take is the holy grail for rate resets assuming amn economy that just grinds along
not so high as to lead likes of BPY and many other to have material credit deterioration as result of variable debt but also
high enough to ensure the current yield on my portfolio will be well into the double digits!
could someone please chime in as to when exactly the proposal was first tabled.
would like to see where o/n, goc5y and CPD were as a reference point
to answer my own question…
roughly speaking the initial change to taxation came in the march budget
after a good start to the year, CPD was in the say 11-11.5 range
canadas were say 3-3.5% already
so given new range for canadas is 50bps higher, still a ways to go to claw back the losses if indeed they were in part driven by insurance co sales
offsetting that might be residual tax loss selling over next few weeks
[…] we have just seen the tide turn due to hopes that monetary policy will soon loosen, reinforced by good news for property insurers with respect to taxation of dividends from their preferred share holdings. But we’ve seen […]