Current State of the Canadian Dollar

Last week the US Federal Reserve increased their target overnight lending rate by 0.25%.  This is the first upward move by the Fed since the big financial crisis.  What does this mean for the Canadian dollar?

First, when the interest rate in a country increases relative to other countries then purchasing financial products in that country becomes more attractive.  When more people want to buy things in your country, there is a bigger demand for your currency.  This will drive up the exchange rate in whatever country increased their rate.  The Loonie has already taken a beating with low oil prices and the (correct) speculation that the Fed would make this move at the end of 2015.  With rumours of a further increase in rates by the Fed in 2016, things are not looking good for a Canadian dollar recovery.

Second, oil is priced in US Dollars. All other things being equal, when the US dollar is stronger the price of a barrel of oil is lower.  This is why the Canadian dollar is so sensitive to American currency fluctuations compared to other countries around the world.  We get hit with the interest rate effect but our dollar is also strongly tied to the price of oil in the markets.  On top of that, the US ban on oil exports has ended and the members of OPEC seem to have parted ways.  This means that the price of oil is unlikely to rebound significantly in 2016.

Under those to two effects we are seeing some 11 year lows for the Canadian dollar and we can expect that to be the norm in 2016.  The Bank of Canada has mentioned that negative interest rates would be something they would consider if they believe it will help.  If we moved to negative rates while the US was increasing theirs we would see another drop down below 70 cents USD.

The best case scenario for Canada is that the US economy is actually at the beginning of a strong recovery. Since they buy 75% of our exports, they will be buying more of everything that we make.   That can help our economy and keep our dollar from sliding further.


The Liberal Middle Class Tax Cut

The National Post today cited a study about the new Liberal “tax cuts for the middle class”.  This study apparently concluded that people with a high income will see a greater benefit from the tax cuts than the people in the targeted income bracket. I have not read the study but I believe I can re-create the incredible insights discerned after what I am sure was hundreds of hours of research and primary source investigation.

Here are the federal tax brackets in 2015:

  • 15% on the first $44,701 of taxable income, +
  • 22% on the next $44,700 of taxable income (on the portion of taxable income over $44,701 up to $89,401),+
  • 26% on the next $49,185 of taxable income (on the portion of taxable income over $89,401 up to $138,586), +
  • 29% of taxable income over $138,586.

If you have a job making $44,701 you pay 15% on your salary. If  you then get a raise to $54,701 you don’t get “bumped to a higher tax bracket” as people like to say.  You pay 15% on the $44,701 and then 22% on the last $10,000.

So now let’s look at another example using the tax rate change.

Before the Tax Rate Change:

Person 1: Salary of $50,000. They pay 15% on $44,701 and then 22% on $5,299 for a total of $7870.93 paid in Taxes.

Person 2: Salary of $95,000. They pay 15% on $44,701,  22% on the next $44,700 and then 26% on the remaining $5,599 for a total of $17,994.89 in taxes.

After the Tax Rate Change 

We will use the same income ranges to make comparisons easier.  They will shift a bit in the new plan but the effect will be the same.

Person 1: Salary of $50,000. They pay 15% on $44,701 and then 20.5% on $5,299 for a total of $7791.45 paid in Taxes.

Person 2: Salary of $95,000. They pay 15% on $44,701,  20.5% on the next $44,700 and then 26% on the remaining $5,599 for a total of $17,324.39 in taxes.

So Person 1 has saved $79.49 a year while Person 2 has saved $670.50.

Anyone above $89,401 will get this $670 benefit. So they will be ahead unless they are above $200,000 where the new 33% bracket is being created.

So, if you make above $89,401 but below $200,000 (what the Liberals call middle class) then you will be getting a greater benefit than someone making less than you just like anyone in the $44,700 to $89,401 bracket will benefit more than anyone that that makes even a single dollar less than them.

The Liberals have not changed their plan. This was always what they said they would do under the name “middle class tax cuts”.  Interesting fact, median income in Canada in 2013 was $32,020.

Feel free to cite this study.