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Finance

A tax guide to starting and running a home business

by Bailey Amber February 7, 2023

Running a home-based business offers a number of advantages, including convenience, flexibility, freedom and cost savings.

It’s great for looking after the kids and also for starting out your business when you can’t afford separate premises. And when it comes to your tax return, you may be eligible for a number of tax deductions.

So, if you run, or are thinking of running, your business at or from home and have a room or space set aside exclusively for business activities, read on.

What is a home-based business?

A home-based business can be run:

At home – that is, you do most of the work at your home, for example, a hairdresser who uses a room as a salon.
From home – that is, your business doesn’t own or rent separate premises, e.g. an electrician who works at a customer’s premises but stores tools at home and has an office to handle the paperwork.

Claiming deductions

If you have a home-based business, you may be able to claim tax deductions for the following expenses:

occupancy expenses (such as mortgage interest or rent, council rates, land taxes, and house insurance premiums)
running expenses (such as electricity, phone, the decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
The cost of business-related motor vehicle trips between your home and other locations, for example, to clients’ or suppliers’ premises.

You can claim a percentage of all these costs if you run a home-based business. To be eligible to claim, the area set aside in your home for your business must have the character of a place of business, for example:

it’s clearly identifiable as a place of business. For instance, you might have a sign identifying your business at the front of your house.
it’s not readily suitable or adaptable for private or domestic purposes
it’s used exclusively or almost exclusively for carrying on your business (a room that’s used for private purposes occasionally won’t qualify, but a room that is used incidentally as an entrance to your home will be OK)
it’s used regularly for visits by your clients.

Examples of businesses that could qualify include:

A bed and breakfast establishment
A hairdresser’s home salon
A caterer’s home kitchen
A photographer’s home studio.

You can claim the percentage of occupancy expenses that relates to the area of your home you use as a place of business and the proportion of the year it was used for business.

A common method of working out how much to claim is to work out the floor area you use for your business as a percentage of the total floor area of your whole home. For example, if the floor area of your home office is 10 per cent of the total area of your home, you can claim 10 per cent of your rent or mortgage interest, council rates and insurance assuming the home office is available for use in your business 100 per cent of the time.

Make sure you keep accurate records of how you worked out the occupancy expenses you claim as deductions, including details of the methodology you have used and the justification for it, copies of mortgage statements, rental payments, home insurance policies and council tax statements.

Running costs

If you can claim occupancy expenses, you will also be able to claim running expenses. From 1 July 2022, you can claim a fixed rate of 67 cents per hour covering the following expenses:

energy expenses (electricity and/or gas) for lighting, heating/cooling and electronic items used while working from home
Internet expenses
mobile and/or home telephone expenses, and
stationery and computer consumables.

You can’t claim an additional separate deduction for any of these expenses. For example, if you use your mobile phone when you are working from home and when you are working away on-site or with clients, your total deduction for mobile phone expenses for the income year will be covered by the hourly rate of 67c per hour.

Alternatively, you can claim actual costs in relation to all of the above running costs plus:

Depreciation of office furniture and equipment
Depreciation of any technology items used in your home working (e.g., laptops, desktops, mobile phones or tablets)
Repairs to any of the above
Costs incurred in cleaning your home office space.

Beware CGT!

There’s a potential snag to be aware of before you start deducting a portion of your occupation costs; you might have to pay capital gains tax (CGT) on the sale of your home when you ultimately sell. Normally your home is exempt from CGT because of the “main residence exemption”, but this doesn’t apply to any part of your home that is used to derive income. So, if you claim deductions for 10 per cent of your home as a place of business, this means that you’ll need to pay CGT on 10 per cent of the profit when you sell.

H&R Block can help you set up your business

If you’re looking to set up your business, talk to H&R Block for advice on how best to do it. Contact our Tax & Business Services team today by email or call 13 40 42 to talk about your business needs.

February 7, 2023 0 comment

Real Estate

Credit unions that offer homebuyers way around stress tests set to grow

by Bailey Amber January 27, 2023

written by Bailey Amber

Provincially regulated credit unions aren’t bound by OSFI’s mortgage stress test and homeowners have taken notice

Published Jan 27, 2023 • 6 minute read

6 Comments

Tougher mortgage qualification rules threaten to push bank loans out of reach for homebuyers. Photo by Jim Wells/Postmedia

There’s a multi-million-dollar corner of Canada’s financial system where a stringent “stress test” imposed by the Office of the Superintendent of Financial Services was never adopted. It’s already attracting homeowners seeking an easier path to qualify for a mortgage amid rising interest rates and it’s poised to grow further as the spectre of even tougher mortgage qualification rules threaten to push bank loans out of reach for homebuyers.

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Provincially regulated credit unions such as Meridian and DUCA are not bound by federal rules, and can choose whether or not to apply OSFI’s strictest qualifying standards for uninsured mortgages, subject to any rules adopted by their provincial regulators.

While the credit union sector has chosen not to widely promote so-called “contract-rate qualification” mortgages — where borrowers are assessed based on actual interest rate they will pay rather than OSFI’s stress test — figures released by Canadian Credit Union Association show the lenders have been steadily picking up business, growing their mortgage books by 4.1 per cent in the second quarter and two per cent in the third quarter of 2022.

Rob McLister, a mortgage analyst and strategist, estimates that hundreds of millions of dollars’ worth of mortgages have been underwritten using contract-rate qualification.

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“Speaking with (executives) at some of these credit unions, the message is that they’ve seen considerable growth in products like contract-rate qualification mortgages,” McLister said. “But that growth is coming off a small base because it’s a small market to begin with.”

Whether the credit unions decide to press their advantage, especially if additional measures tighten lending standards for the banks, remains to be seen.

Those new measures, proposed by the federal banking regulator in January in a consultation aimed at addressing the impact of rising rates on households already steeped in debt, could add even more onerous loan-to-income and debt-service coverage restrictions to the existing stress test. Since 2018, OSFI rules have pegged the qualifying rate for an uninsured mortgage at the greater of the contract rate plus two per cent, or 5.25 per cent.

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Bank and office towers in Toronto's financial district. — Bank and office towers in Toronto’s financial district. Photo by Peter J. Thompson/National Post

Any of the individual proposed additional measures would limit buying power for would-be homeowners, said McLister, who suggested some borrowers “will most definitely gravitate to credit unions that don’t adopt OSFI’s guidelines.”

Most credit unions in Canada are regulated in a distinct provincial and territorial system parallel to Canada’s big banks. There is much alignment, but also regional differences including the amount of deposit insurance on chequing and savings accounts. In 2012, the federal government paved the way for credit unions to expand beyond provincial borders to become federal financial institutions, but there was very little uptake.

Some credit unions and their regulators have mirrored OSFI’s most stringent mortgage qualification standards to date. However, others such as Meridian, the country’s second-largest credit union, still offer a contract-rate qualification mortgage with terms that were in place before OSFI updated its stress test in 2018.

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“We offer contract-rate qualification mortgages in some instances,” said Teresa Pagnutti, senior manager of public relations at the St. Catharines, Ont.-based Meridian.

Like all the credit union’s lending programs, such loans are extended based on a “holistic and prudent review” including assessing a customer’s cash flow and borrowing capacity, she added.

Meridian offers contract-rate qualification mortgages. Photo by Peter J. Thompson/National Post

Meridian tells prospective buyers on its website that, as a credit union, it is “more flexible than banks when it comes to approving mortgages” and can help those who wouldn’t pass the federal stress test buy their dream homes by taking “income appreciation” and accelerated payment options into account.

Last year’s gains in mortgage volumes in the credit union segment of the market came as interest rates began to rise following an extended period of ultra-low rates.

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The Bank of Canada announced three hikes to its key overnight rate in the second quarter of 2022, lifting it to 1.5 per cent before a monster 100-basis-point increase in July. By the end of the year, rates had climbed further, reaching 4.25 per cent, and the central bank announced another 25-basis-point hike on Jan. 25, 2023.

The credit unions’ gains were achieved even as the number of homes bought and sold was falling. Transactions in July, for example, came in 29.3 per cent below activity in July 2021, according to the Canadian Real Estate Association (CREA). Sales were down in roughly three-quarters of all local markets, led by large cities and their surrounding areas including Toronto, Vancouver and Calgary.

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For those struggling to afford a home with interest rates well above where they sat for many years — even as house prices cool — going the route of a contract-rate qualification mortgage could be appealing.

Credit unions have added new mortgage customers even as the number of homes bought and sold fell. Photo by Paul Morden/The Observer

McLister said the contract-rate qualification formula alone gives a borrower between five and 11 per cent more buying power, depending on the lender and term and assuming a 30-year amortization.

His ballpark estimate that the size of the market is in the hundreds of millions of dollars, which he called “conservative,” is based on total annual mortgage originations at credit unions and the percentage of volume coming from contract-rate qualification mortgages, as extrapolated from data at a sample of credit unions. Though it’s a considerable amount of money, he noted that it represents a small corner of the roughly $450 billion in new mortgages underwritten each year.

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Still, it’s a segment of the market that has drawn the attention of analysts at credit rating agency DBRS Morningstar. In a Jan. 10 report, they highlighted the differences at credit unions across Canada when it comes to adoption of OSFI’s strict mortgage underwriting guidelines.

DBRS noted that while most credit unions have underwriting practices that “emulate the spirit” of OSFI’s original stress test from 2012, some of them — notably in British Columbia and Ontario — have not updated the more “rigorous” test adopted in 2018.

Provincial regulators in Alberta and Saskatchewan, on the other hand, did follow the more rigorous test in OSFI’s guideline B-20 for credit unions in those provinces, a stance the DBRS analysts said they viewed “positively.”

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Russ Courtney, a senior media relations officer at the Financial Services Regulatory Authority of Ontario, which regulates credit unions in Canada’s largest province, said the act that governs the member-owned financial co-operatives does not require prescriptive interest rate stress testing in residential mortgage underwriting. Instead, credit unions can determine the type of stress testing that is most appropriate for their individual mortgages and mortgage portfolios.

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“As such, each institution has its own approach, reflecting what is most appropriate for the characteristics of their residential mortgage business,” Courtney said, adding that FSRA closely monitors and assesses the activity and risk profiles of credit unions and performs its own internal stress tests on credit union mortgage portfolios.

He said the provincial regulator has not seen what it considers to be a “material” increase in the volume of residential mortgage business activity or in the risk profile of Ontario credit unions.

One reason for the muted uptake might be that, as the DBRS report noted, even credit unions that do not use OSFI’s strictest qualifying standard as a general rule must do so for some home loans if they hope to use mortgage securitizations as a source of funding available through programs available through the Canada Mortgage and Housing Corporation (CMHC).

Another factor that could be keeping a lid on the shift to credit unions is that few broker-channel lenders offer mortgages underwritten at the qualifying rate and the public is largely unaware they exist, according to McLister.

“Only a small percentage (of credit unions that offer them) promote contract-rate qualifying publicly or to third parties” such as brokers, McLister said.

• Email: bshecter@nationalpost.com | Twitter: BatPost

January 27, 2023 0 comment

Personal Finance

More pension plans in surplus due to higher interest rates, but inflation risks abound: Mercer

by Davies Otwell January 3, 2023

written by Davies Otwell

Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.

Higher interest rates are causing headaches for some homeowners, but one place the rapid increase in rates is helping is in the solvency of defined-benefit pension plans.

Despite the significant volatility and market declines in 2022, the Mercer Pension Health Pulse, which tracks the median solvency ratio of the defined benefit (DB) pension plans, finished the year at 113 per cent, up from 108 per cent at the end of September and 103 per cent at the beginning of 2022.

The improved position was primarily due to the significant increases in interest rates during 2022 because higher rates lead to lower pension liabilities.

Of the plans in Mercer’s database, 79 per cent are estimated to be in a surplus position on a solvency basis compared to 61 per cent at the end of 2021.

Despite this relative improvement, the pension consultant said some plan structures are vulnerable to macroeconomic developments.

For example, the financial positions of plans that use leverage on the fixed-income component of their asset mix and also invest in equities would have likely decreased, said Ben Ukonga, a principal at Mercer and leader of the firm’s wealth business in Calgary.

Moreover, if there is “continued high inflation, capital market headwinds, and geopolitical tensions, 2023 could turn out just as volatile as 2022,” he said.

For sponsors of final average earnings and/or indexed pension plans, the impact of the already realized high inflation could be significant, Ukonga noted.

“Coupled with the potential for the high level of inflation to continue, even if only for the short to medium term, these plans could have large inflation-related liability risks that may not be immediately apparent to the plan sponsor and other stakeholders,” he said.

In an effort to tame inflation, the Bank of Canada increased its key policy rate seven times in 2022, from 0.25 per cent at the beginning of the year to 4.25 per cent.

Mercer said sponsors of non-indexed defined benefit plans, particularly those in a surplus position, could face calls for “ad hoc” cost of living adjustments from pensioner groups.

The picture in 2022 was somewhat dimmer for defined contribution (DC) plans, group RRSPs and group TFSAs which, unlike defined-benefit plans, do not guarantee annual payouts. Mercer said the majority of these plan members would have experienced “negative investment returns” in their accounts last year.

The S&P/TSX Composite Index was down 8.66 per cent in 2022, the largest one-year decline since the end of 2018.

“For members close to retirement, this may alter their retirement decisions,” Mercer said, adding that the high inflationary environment could also influence when pensioners choose to leave the workforce.

• Email: bshecter@nationalpost.com | Twitter: BatPost

January 3, 2023 0 comment

Real Estate

Loss of HSBC Canada as competitor in mortgage space could raise costs for everyone, industry watchers say

by Bailey Amber December 1, 2022

written by Bailey Amber

Even with regulatory action, no guarantee bank’s cut-rate mortgages will survive

A ‘for sale’ sign displayed outside a home in Toronto. Photo by Carlos Osorio/Reuters files

HSBC Canada has become a feisty competitor to Canada’s largest banks since entering the residential mortgage market in a big way in 2016, undercutting rates and taking market share.

And while Royal Bank of Canada chief executive Dave McKay said he isn’t expecting a challenge from competition authorities over his bank’s $13.5-billion deal announced Tuesday to acquire the independent challenger, market watchers expect the removal of HSBC will be felt.

On Wednesday, mortgage analyst and strategist Rob McLister called HSBC “the most important competitor in the mortgage market,” adding that it was advertising five-year fixed rates this week that were “a tidy 40 (basis points) below RBC.”

Vancouver realtor Steve Saretsky also tweeted about the acquisition Tuesday morning, noting that HSBC Canada was “notorious for undercutting big bank mortgage rates.”

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RBC to purchase HSBC’s Canadian business for $13.5B. It’s worth noting that HSBC was notorious for undercutting big bank mortgage rates.

— Steve Saretsky (@SteveSaretsky) November 29, 2022

If, as expected, HSBC’s business lines are rolled into RBC’s when the deal closes — the target is late next year — such competition will be difficult to replicate.

HSBC has been operating in Canada since 1981, a period in which several other international banks have come to the market as challengers only to retreat after a few years. Some that remain, such as Capital One, confine their challenges to the Canadian behemoths to high-yield lending products such as credit cards. Others, like Citigroup, focus on niche market segments in Canada, such as corporate services targeting mid-sized companies.

HSBC remains a small player in Canada when compared to the Big Six — McKay pegged the market share around two per cent on a conference call Tuesday — and that fact may shroud its aggressive stance on mortgage lending.

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“It doesn’t take us anywhere close to the normal Competition Bureau threshold,” McKay said of combining the two banks. “Therefore, you know, there’s no areas of concern that we’re aware of, that the Competition Bureau should have.”

But that analysis omits a couple of key facts, in McLister’s view. “HSBC is and has been the only competitor with low enough funding costs and big enough scale to consistently challenge the Big 6,” he said.

In addition, the mortgage rates HSBC offers are “widely used as bargaining chips” to negotiate with other banks.

“If they don’t match HSBC’s rates, banks generally discount the customer’s rate to win the deal,” McLister said. “As a result, if HSBC’s exceptional rates did not exist, there’s little doubt that Canadians would potentially incur hundreds of millions of dollars in annual cumulative interest expense.”

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If HSBC’s exceptional rates did not exist, there’s little doubt that Canadians would potentially incur hundreds of millions of dollars in annual cumulative interest expense

Rob McLister

Until it was put on the block in October, HSBC Canada was a subsidiary of HSBC Holdings PLC, one of the world’s largest banks, and boasted “global scale” and “an extensive network covering Europe, Asia, North and Latin America, and the Middle East and North Africa.”

The Canadian unit’s contribution to the parent company came largely from its commercial banking, not its retail operations. It represented just three per cent of global customer accounts.

HSBC Canada’s retail book is mostly residential mortgages, at 92 per cent, with the balance split between home equity lines of credit and other personal loans, according to analysts at Canaccord Genuity Corp.

Mortgages are a way for banks to get clients in the door, and then try to sell them more financial products and services.

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Scott Chan, a bank analyst at Canaccord Genuity, said in a note to clients this week that HSBC clients tended to be “more affluent” on average than those at the rest of the Big Six including RBC.

The potential for relationships with high-net-worth clients with good credit — who could be sold investments and further credit lines — could make it worthwhile to take a bit less on a mortgage rate, McLister said.

“The model worked,” he said. “Hence they could justify undercutting almost everyone else on uninsured financings.”

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The cost and mix of funding are crucial components that determine the profitability of a mortgage lending portfolio. The lower the cost, the less interest must be charged to maintain the same profit. Banks tend to use deposits to fund their mortgages, while non-bank lenders can’t take deposits and rely on other borrowing, which is often more expensive. HSBC, for example, had access to billions in domestic deposits, as well as covered bonds and a mortgage-backed securities program.

So while an RBC executive said there were “50 different retail banks in the Canadian market” and described a “ferocious, exceptionally efficient mortgage industry” on the conference call with media Tuesday, few to none of those players can be expected to have the same access to cheap funding as HSBC.

That means the level of competition in the residential mortgage market over the past six years may be difficult to maintain even if RBC’s purchase is blocked by either government, regulatory or competition authorities.

“HSBC will likely be sold to someone regardless,” McLister said in an email, noting that there are no obvious suitors aside from Canada’s largest banks.

“And there’s no guarantee another buyer will maintain its competitive mortgage offerings.”

• Email: bshecter@nationalpost.com | Twitter: BatPost

December 1, 2022 0 comment

Real Estate

Smith Financial’s deal for Home Capital shakes up alternative lending space

by Bailey Amber November 22, 2022

written by Bailey Amber

Ripples from the $1.7-billion transaction could extend to other pockets of the banking space, analysts say

A house for sale in Toronto. Photo by Brett Gundlock/Bloomberg files

One of the biggest players in Canada’s non-bank mortgage market is giving the sector a vote of confidence in the face of a housing downturn that has put pressure on origination volumes and share prices.

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Smith Financial Corp., a holding company controlled by First National Financial Corp. co-founder Stephen Smith, announced Monday that it was acquiring alternative lender Home Capital Group Inc. for $1.7 billion.

The $44-per-share cash offer came at a 63 per cent premium to the company’s closing share price on Friday and was well-received by the analyst community, which largely saw it as a good value offer for Home Capital shareholders.

Smith Financial already owned 9.1 per cent of Home Capital’s shares as well as a significant stake in EQB, the parent to alternative lender Equitable Bank, but the ripples from this transaction could extend to other pockets of the banking space, analysts said Monday.

Canaccord Genuity Corp. analyst Scott Chan noted that the transaction could benefit regional banking players such as Canadian Western Bank and Laurentian Bank, which have alternative mortgage exposures. He added that it could also renew attention on the potential sale of HSBC Canada, another mortgage industry player.

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“We believe (the Royal Bank of Canada) is still the most likely acquirer as they can fund the entire HSBC Canada transaction with excess equity … but would have competition concerns given its (number one personal and commercial banking) share in Canada,” Chan wrote in a Nov. 21 note.

The deal comes at a time when rising interest rates have been reducing the demand for mortgages and raising the risk of a recession. Home Capital’s third-quarter results showed the effect of the slowing housing market, with single-family mortgage originations plunging by 28 per cent from a year earlier.

But Nigel D’Souza, a financial services analyst at Veritas Investment Research, said the drop in mortgage demand and rising default risks as mortgages come due for renewal come with an upside, in that higher interest rates will allow lenders to generate higher interest income from loans and mortgages.

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“We think the mortgage rates are going to start benefiting bottom line, you’re going to see margins expanding starting in the fourth quarter for Home Capital, and that’s what we expect to drive a lot of the earnings growth for the business,” D’Souza said, adding the EQ Bank saw its shares jump following its third quarter results partly because the company reported a higher net interest margin.

National Bank of Canada analyst Jaeme Gloyn estimated in an Oct. 24 note that 66 per cent of Home Capital borrowers would need to renew their mortgages over the next 12 months and could expect to pay $1,190 more on monthly payments on average.

Higher rates also mean that fewer customers are likely to leave companies like Home Capital since the rates would likely be higher at other companies, D’Souza noted, making the company’s client retention rate higher.

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D’Souza also said that despite recession risks and a more anxiety about mortgage defaults, Home Capital’s risk-adjusted interest margins are what matters most if the economy gets worse.

“For Home Capital, in order for the risk-adjusted margin to have an unfavourable outlook, credit losses would again have to significantly exceed credit losses that Home Cap experienced during the financial crisis,” D’Souza said, adding that such losses would have to be about two or three times higher for it to be a significant concern.

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Though some analysts have been warning of mortgage default risks, D’Souza suggested that any impact would be limited.

“So, even if there is a default, they could still go through a forced sale of that property and probably recoup the entire loan value,” D’Souza said, adding that home prices would need to decline significantly over the short term and borrowers would have to default following that drop-off in value before Home Capital starts taking sizeable losses. “For that reason, I don’t think it’s likely that you’re going to have these outsized credit losses that are going to more than offset the benefit from margin expansion.”

D’Souza said that the deal was unlikely to alter the share of the market held by alternative lenders.

“I don’t think you’re going to see this change the dynamics of the mortgage market, how it functions, how it would affect customers looking for a mortgage or the market share of different lenders in the space,” D’Souza said. “I think it only really changes things materially for Home Capital shareholders. That’s really who benefits from this transaction.”

Overall, D’Souza said, the Big Six maintain a stranglehold on roughly 70 per cent of the country’s mortgage market.

• Email: shughes@postmedia.com | Twitter: StephHughes95

November 22, 2022 0 comment

Real Estate

Home Capital — the mortgage lender bailed out by Buffett — is being bought by Smith Financial

by Bailey Amber November 22, 2022

written by Bailey Amber

It survived a regulatory probe, short-seller campaign and partial bank run

The Toronto offices of Home Capital Group. The mortgage lender is being acquired by Smith Financial Corp. Photo by National Post

Home Capital Group Inc., the Toronto-based alternative mortgage lender that survived a regulatory probe and short-seller campaign before being bailed out by Warren Buffett’s Berkshire Hathaway in 2017, is being acquired by Smith Financial Corp. in a deal that values the company at $1.7 billion.

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The $44-per-share offer from the company controlled by Canadian businessman Stephen Smith represents a 63 per cent premium to Friday’s closing price and a 72 per cent premium to the 20-day volume-weighted average trading price.

If finalized, the deal will put two of Canada’s largest alternative lenders under the same umbrella: Smith, chair and co-founder of non-bank lender First National Financial LP, is also the largest shareholder of EQB Inc., formerly Equitable Group Inc., which provides residential and commercial real estate lending services and personal banking. He owned or controlled nearly 19 per cent of EQB’s voting shares through private holding companies, according to an April regulatory filing.

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In the run-up to the proposed acquisition by Smith’s group, shares of Home Capital shares had declined as it faced rising interest rates and looming renewals of a large chunk of the mortgages on its books. In August, the company said it had rebuffed an approach from an unnamed buyer because the price offered was too low.

But the stock had climbed back significantly from the company’s rockiest years between 2015 and 2017.

During that period, the company lost its long-time chief executive Gerry Soloway, who was at the helm when an internal probe revealed some 45 brokers had falsified employment and income information used to support a large proportion of mortgage applications, and had also falsely documented completion of income verification.

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The brokers were let go, but Home Capital “misled” shareholders for months about the reasons for a decline in mortgages originations that followed, according to a 2017 settlement with the Ontario Securities Commission.

Prior to the run-in with regulators, Home Capital was well-regarded, one of Canada’s largest near-prime or alt-A mortgage lenders, extending mortgages to those who did not qualify for the rates offered by the country’s big banks. Home Capital secured a niche serving the self-employed and immigrants who did not yet have a significant credit history in this country, funded by a thriving deposit business.

When the OSC made allegations of misleading disclosure against the company in the spring of 2017, customers began to pull deposits from Home Capital’s high-interest savings accounts and GICs, which helped fund the company’s mortgage lending.

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The partial bank run caused Home Capital to take $2 billion in rescue financing at high interest rates, raising questions about its viability.

Some company observers, including Jim Keohane, who was at the helm of the Healthcare of Ontario Pension Plan (HOOPP) when it extended the $2-billion lifeline to Home Capital, viewed the upheaval as overblown, given that many of the troubled mortgages would have rolled off the books by the time the OSC levelled allegations against the company.

But California-based short-seller Marc Cohodes, who had invested in Home Capital in 2014 after concluding the shares were potentially overvalued, carried out a vocal campaign suggesting a plunge in the company’s share price following the OSC’s allegations was only the beginning.

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In June of 2017, Home Capital agreed to pay $30.5 million to settle both OSC allegations of misleading disclosure and a class-action lawsuit in a dual agreement that appeared to be designed to help salvage the troubled mortgage lender as a going concern or viable takeover target.

Also that month, Buffett’s Berkshire Hathaway replaced Home Capital’s emergency $2-billion credit facility and took a 19.9 per cent stake in the mortgage lender. A bid to nearly double that stake was, in a surprise turn of events, rejected by Home Capital shareholders that September.

The following year, with the loan repaid, Buffett declared he would “substantially exit” his position in the Canadian firm, saying the stake was “not of a size to justify our ongoing involvement.”

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With the regulatory tangle behind it and a new slate of executives, the company moved on, setting out a strategic plan in 2019 that included digitizing operations. The shares began to rebound, dipping again only in the early days of the COVID-19 pandemic.

The acquisition of Home Capital by Smith Financial is expected to close in mid-2023, subject to regulatory approvals. The company’s board of directors unanimously approved the transaction, which it concluded is in “the best interest of Home Capital and is fair to its shareholders.”

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Directors and senior officers have entered into voting support agreements with the buyer, agreeing to vote all of the common shares they own or control in favour of the acquisition.

However, a “go-shop” period through Dec. 30 will allow Home Capital to “actively” solicit, evaluate and enter into negotiations with anyone else interested in acquiring the company, with Smith Financial retaining a “right to match” at the end of that period.

Jaeme Gloyn, an analyst at National Bank Financial, said he believes the deal will go ahead as planned despite the go-shop period, based on the size of the bid and the buyer.

“My initial guess (for the unnamed suitor) in August was Fairstone Financial, which is owned by Stephen Smith so I doubt he outbids himself,” said Gloyn.

Other potential buyers include the “usual suspects” such as Onex Corp., Fairfax Financial Holdings Ltd., and Brookfield Business Partners L.P., he said, but he thinks they are “unlikely to pay more.”

• Email: bshecter@postmedia.com | Twitter: BatPost

Billionaire Stephen Smith has a common name, but some uncanny talents

by Davies Otwell November 22, 2022

written by Davies Otwell

Financial services tycoon has an uncommon talent for making vast quantities of money while generally staying out of the spotlight

Stephen Smith, under-the-radar billionaire, at Queen’s University, his alma mater. Photo by Suzy Lamont/Queen’s Alumni Review

Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.

Stephen Smith is a remarkably common name in Canadian business. There is Stephen Smith the marketer; a Stephen Smith in structured finance; Stephen Smith the chartered financial analyst; and Stephen Smith the applications team lead.

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Of course, there is also Stephen Smith the Canadian billionaire and financial services tycoon, who has an uncommon talent for making vast quantities of money while generally staying out of the spotlight.

So much so that when Smith, whose middle initials are J.R., donated $50 million to Queen’s University and the Kingston, Ont.-based institution renamed its business school after him, navy blue t-shirts with the words — “Get to know Smith” — were produced in his honour, because no one at his alma mater really knew that much about him.

“Stephen is as modest as they come,” John Ruffolo, the venture capitalist who cycles with Smith and knows him socially, said. “You would never know that he was a billionaire. But I do have to tell you — and I don’t know how old he is — but that guy is tough as nails, and he is a very good cyclist.”

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For the record, that guy is in his early seventies and is very good at many things, including building and buying companies. Smith is the Smith in Smith Financial Corp., which is acquiring mortgage lender Home Capital Group Inc. for $44 a share in a deal valuing the company at $1.7 billion.

He is also co-founder of First National Financial Corp., a mortgage lender and mortgage-backed securities industry disruptor, started in 1988. He is chair and part-owner of Canada Guaranty Mortgage Insurance Co., as well as the largest shareholder in alternative lender, Equitable Bank.

Smith donated $50 million to Queen’s University and the Kingston, Ont.-based institution renamed its business school after him. Photo by Queen’s University

Just in case that is not enough to keep a fellow busy, he is chair of Historica Canada, the not-for-profit behind the Canada Heritage Minutes. Anthony Wilson-Smith, chief executive of Historica Canada, has known Smith for more than a decade, but has never known him to rest on his laurels, or, for that matter, rest at all.

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“He has never actually said this to me, but I would say his biggest fear is that he doesn’t want to get bored,” Smith said. “He has got all the money he could ever need, and yet here he is making this very big deal right now.”

The billionaire is certainly all business at Historica Canada board meetings. Meetings start when they are scheduled to start and end when they are scheduled to end, and, without fail, all the agenda items are ticked.

This thoroughness could, plausibly, have something to do with Smith’s childhood. He was a ham radio hobbyist and a computer geek back when computers were the size of small buildings. He got into coding, studied electrical engineering at Queen’s, and then studied some more at the London School of Economics before working a series of jobs at Philips Electronics, Canadian Pacific Ltd. and aircraft manufacturer Hawker Siddeley.

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Smith has said the experience of working for someone else taught him that he was smarter than his bosses and better suited to being an entrepreneur. That is the path he took when he started buying and flipping houses in Toronto in the early 1980s, before it became the cool thing to do.

Unfortunately, rising interest rates and bad decisions would wipe him out. Smith declared personal bankruptcy, moved in with his sister and brother-in-law, and wondered if he would ever regain his confidence.

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“When everything is gone, you wonder if you’ll ever have the confidence to make the right decision about anything again,” he once told a Queen’s alumni event. “But the only way to deal with it is to just find a job, get up each morning, and go to work, and, bit by bit, rebuild your self-confidence.”

Smith and his partner, Moray Tawse, started First National in 1988 as a mortgage lender, but they spotted an opportunity early on to expand into mortgage-backed securities. By putting the computer geek’s coding skills to good use, they were able to stay ahead of the competition amid the technology revolution in financial services.

First National today has a market cap of more than $2 billion. Its co-founder, meanwhile, has a new purchase on his hands, Home Capital Group. His name might be common, but his accomplishments are anything but.

“You would never know how successful Stephen is,” Ruffolo said. “He is not a greedy guy, he does this for the intellectual stimulation, and he is incredibly shrewd.”

• Email: joconnor@nationalpost.com | Twitter: oconnorwrites

November 22, 2022 0 comment

Business

Budget 2022-23: Here’s what Australia Inc is wishing for

by Bailey Amber October 24, 2022

written by Bailey Amber

Australia has been promised a budget that will be “resilient” but “not fancy” on October 25. As the world hovers on the cusp of a recession, Jim Chalmers has attempted to temper expectations for the Albanese government’s first budget.

The Treasurer has stated that “tough decisions” will need to be made as Labor begins the difficult task of budget repair, finding savings while funding election promises and covering the rising costs of essential public services.

All eyes are on the Federal Budget in anticipation of what steps the government will take to help mitigate the rising costs since the inflation rate is predicted to reach 7.75 per cent this year.

SMEs that have survived COVID are now facing a brand-new, unheard-of challenge that could make or break the Federal Budget. We have compiled a list of what CEOs want and what they anticipate from the upcoming budget.

Paul Tory, Founder and CEO, Foodbomb, (food tech)

“The number one thing we want to see from the Labor government’s new budget is greater support for the food and hospitality industries. The last two years have been devastating for food businesses, with the pandemic followed by a year of wild weather and scarcity of supplies. Not to mention, the skills and staff shortages have pushed an already struggling industry to the brink.

“We’re now seeing dishwashing jobs going for $90 per hour, and business owners still unable to fill roles. With the cost of living more pertinent than ever before, we need to see some relief from the government for the people who feed us. The Liberals budget earlier this year delivered little relief for the food or tech industries, where we intersect, so we have hopes the Labour Government will not turn a blind eye to these two key drivers of our economy.

Kyle Bolto, Founder and CEO, Ohmie Go, (sustainability and prop tech)

Sustainability and high-tech manufacturing

“Sustainability is undoubtedly one of the most important issues both in Australia and across the globe right now. Therefore, financially and from an innovation standpoint, greater support is essential right now.

“Specifically, we’d like to see high-tech manufacturing brought back to Australian shores in order to develop tech to address these issues. We have the tech, talent and economy to support a boom on our own shores and spur innovation.

Transport, smart cities and innovation

“As early innovators in the e-mobility space, we’re harnessing technology to the fullest to allow everyone to participate in the transition to electric. We want to ensure no one gets left behind, including apartment dwellers and those living in the regions. However, for that to happen, the government needs to focus less on private vehicle ownership and consider other mobility solutions for smarter, more sustainable cities and regions.

“With that in mind, there need to be greater initiatives by the government surrounding future cities and infrastructure to encourage businesses and consumers to move away from environmentally unsustainable transport methods. Likewise, further support for innovation and tech is also essential to ensure Australian businesses are at the cutting edge of change in e-mobility, sustainability and transport.

Annemarie Rolls, CEO, General Sir John Monash Foundation

“Australia has reached a pivotal moment in its history, facing complex economic and environmental challenges that will deeply impact all of our lives. This is why we need further investment in education and continued support for Australia’s best and brightest to tackle these existential challenges and lead Australia towards a better future.

“Despite the reasonable decision to revoke the funding allocated to the Australian Future Leaders Program, we would like to see a continued focus on funding the development of Australia’s Future Leaders in this Labor budget for deserving organisations that are already supporting Australians doing incredible work across academia, business and diplomacy. Facilitating our emerging leaders to be as well-equipped as possible to fulfil their potential to be the leaders we need so badly will be a worthy investment.

“Australia’s not-for-profit sector has struggled immensely through the pandemic and is in need of budget support that can bolster their efforts and allow them to continue providing opportunities to Australians who would never normally be given a chance.”

Piet van den Boer , Head of Marketing, Frollo

“With the rising cost of living, Australians are more than ever looking for better ways to manage their money and get a better deal on their finances. Many services provide them with options at the cost of sharing their bank account credentials and unlimited access to their finances.

“But there’s a better way, one that’s been in development for nearly three years: The Consumer Data Right (CDR) enables consumers to use their data to access better financial services securely.

“But consumers are understandably wary of sharing their financial data and aren’t aware of the security and privacy protections that CDR has in place. Now that CDR has matured enough to become a true alternative to traditional ways of sharing financial data, it’s time to start educating consumers about this government-regulated scheme.

Anny Le Wilson, Chief Revenue Officer, Joust

“We’ve seen the biggest impact on new loans vs refinancers in the market not only due to the rapid increase in interest rates over the last couple of months but also due to the huge spike we have seen in food and petrol prices, showing that first home buyers are concerned about the impact of high mortgage repayments on the cost-of-living, essentially avoiding entering the property market at this time.

“First-home buyers in the market are decreasing due to mortgage repayments being a high cost of living concern. As a result, there needs to be more support factored into the federal budget to help first-home buyers get into the property market with the expansion of the Home Guarantee Scheme.

“We expect that the Budget will look to ease the cost of living for households with tax offsets and bonus payments.”

Jonathon Miller, Managing Director for Australia, Kraken

“I hope to see the budget deliver measures that recognise the urgency for Australia to move forward with crypto/blockchain-specific initiatives in the region. Australia has the opportunity to become a market leader in fintech competition and crypto/blockchain technology, but only if we sustain the right regulatory environment and support mechanisms for businesses in the space that help continue to drive innovation, competition and success here, as well as attract top-tier talent.

“The Treasury has already expressed commitment to moving forward with recommendations from last year’s Senate Committee report on regulating digital assets, including launching a token mapping project as a first step. This is a good start, but it would be great to see broader thinking beyond regulatory projects with more proactive support for crypto/web three start-ups, education and career pathways in this space as well.”

Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.

October 24, 2022 0 comment

Business

Founder Friday with Anil Sagaram: connecting consumers with sustainable (and rewarding) financial solutions

by Bailey Amber October 14, 2022

written by Bailey Amber

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For today’s consumer with even the best of intentions, it can be daunting to evaluate how sustainable their choices really are. What are the unintended consequences of their recent spends? How environmentally friendly is their super fund? Is their bank lending to fossil fuel companies?

This dilemma is only made more complicated by corporate greenwashing, when companies purport to be environmentally conscious for marketing purposes without tangible actions to back it up.

A Sydney-based start-up, however, is cutting through the fat by providing a consolidated view of users’ finances to empower them towards smart, sustainable choices.

“I suppose we’re creating a bit of a new category that doesn’t really exist in the market,” observed Anil Sagaram, founder and CEO of Acacia Money.

“You’ve got climate tech companies that are really focused on driving climate and environmental outcomes. Then you’ve got fintech companies that are helping people manage their money. Acacia’s really bridging the two.”

Funded by a mix of staff, angel investors and working partners, including an investment from Impact Ventures as part of EnergyLab’s 2022 Climate Solutions Accelerator, the platform is making it easy and rewarding for consumers to turn the dial on climate change.

“There’s growing awareness of how interconnected our world is and what we’re trying to do with Acacia is empower people to have an impact on the future through the choices they make. It’s quite exciting in terms of both the role of technology and the awareness,” Anil added.

Expanding the scope of financial services

As a business leader with over two decades of experience developing financial platforms, including the Panorama wealth platform for BT Financial Group, part of Westpac, Anil witnessed firsthand how “the financial system could either make or break the climate transition.”

“Superannuation and banking choices can actually drive the bulk of your environmental impact. Consumers could drive up to some say 70 per cent, but certainly north of a 50 per cent, reduction through the choices they make and that’s a huge number,” he said.

This knowledge, combined with a strong connection to nature from growing up in the far north of Western Australia, ultimately drove him towards creating something with a positive impact. In 2020, he stepped away from the corporate world to launch Acacia Money, alongside technology leader and solutions architect Chris Markey.

Anil added, “For the first 18 months or so, we were focused on getting the core operating system and foundation in place. We’ve had the Acacia app up and running over the last 12 months, testing it with users. We’re making sure we’ve got a solution that really delivers the desired outcome.”

Through Acacia’s open architecture platform, a user’s various accounts like their super, investments, even energy providers, are brought together to paint a comprehensive view of their individual carbon impact. Their accounts performance is measured against competition by Acacia’s analytics engineers through transparent data systems, leaning on independent research, industry averages, and other ESG assessments to cut through the greenwashing.

If there are better financially and environmentally friendly alternatives, users are provided with tools to make an easy switch. They’re also able to access financial advice partners to ensure they’re building wealth while making meaningful changes.

In another ‘green’ move, Acacia also pledges to plant a tree every time users make a more sustainable switch, partnering with Greenfleet for their first Green Rewards initiative.

ALSO READ: Founder Friday with Jacinta Timmins: the secrets of launching a sustainable apparel brand

Not just for younger consumers

One wouldn’t be remiss to assume Acacia’s model might largely appeal to younger demographics. Just last year, millennials (ages 23 to 32) lead the pack in a PwC survey of generational differences in eco-friendly consumerism.

However, Anil notes, Acacia’s users come from across the age spectrum.

“We often think of climate engagement as the ‘millennial mindset’ but it’s increasingly become a broad phenomenon. Look at the floods, the bush fires […] There’s growing engagement with environmental issues,” he explained.

“We’re really noticing success with people comfortable with digital tools. If you think about digitization, you think of Netflix, Uber, Airbnb – all these platforms using data to provide insights you need while removing friction from the end-to-end process. Ultimately, that’s what Acacia is designed to do.”

Tips for aspiring entrepreneurs

With Commonwealth Bank of Australia, Morgan Stanley, and GBST among the other impressive names on his resume, Anil certainly has some business advice to spare. The most important, perhaps, is the importance of building connections.

“Since I spent my career in large banks and large corporations, before moving into the startup community, I think the number one lesson is the power of network and the power of your connections. You don’t need to have all the answers. It’s about surrounding yourself with people and partners that can help you achieve your goals,” he said.

“We’ve found a lot of great partners that have allowed us to build the platform out, rather than trying to solve everything ourselves. And I think that’s probably a big distinction in leaving a corporation where it’s all about what’s in the building to a start-up where it’s all about the network out in the world.

“So I encourage people just to connect and have those conversations and learn through them. See how you can solve things collectively rather than individually.”

Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.

ALSO READ: Founder Friday with Paul Tory: creating smarter ordering solutions for the hospitality industry

October 14, 2022 0 comment

Innovation

DeFi: The Financial Foundation Bridging Fiat Currencies to Cryptocurrencies

by Alena Eager April 23, 2022

written by Alena Eager

Opinions expressed by Entrepreneur contributors are their own.

Decentralized Finance (DeFi) is an umbrella term for financial products (lending, trading, savings etc.) that don’t require a centralized institution like a bank or exchange broker. Instead, they run on smart contracts, which are automatically executed when certain conditions are met. Users transact directly with each other and maintain control over their assets.

First DeFi apps appeared around 2017, but it was in 2020-2021 that the market really exploded, reaching a valuation of $100B. Apps like Compound, Curve and Uniswap handle billions in volume.

Nevertheless, the DeFi industry is facing some formidable challenges. Perhaps the biggest is connecting fiat (traditional currencies, like USD) and crypto. The general consensus is that DeFi can and should foster the coexistence of both fiat and crypto – but how? This guide explores the most promising solutions.

Providing Bank Lending Services for Both Crypto and Fiat

DeFi can generate a synergy of crypto and fiat by integrating traditional currencies in decentralized financial products. After all, fiat-based banking systems have been the lifeblood of the global economy for as long as there HAS been a global economy. Banking services such as easy lending contribute vastly to the sustainability of the financial sector globally and to the citizens who rely on loans in their daily lives.

DeFi can unite the crypto and fiat worlds by providing similar lending and banking services using BOTH types of currencies in tandem. Examples include Compound, MELD and Aave. Most of these platforms offer loans in crypto and also in fiat, backed by an existing cryptocurrency stake, or the converse. By doing this, a DeFi network crypto holders with faster access to standard fiat assets without losing or diluting their existing crypto stake.

Already, there are multiple DeFi networks providing lending services using both fiat and crypto. Offering cash loans by using crypto as collateral is a good way of fostering this type of old and new currency coexistence.

Allow Fiat Backing in Stablecoins

Another promising way to allow the coexistence of crypto and DeFi is by leveraging the concept of stablecoins. Stablecoins are simply a class of crypto assets backed by another asset such as Gold, commodities or fiat currencies such as the U.S. dollar.

However, it is vital that more upcoming DeFi projects provide similar stablecoin services to allow for the coexistence of both crypto and fiat in the financial sector. As stablecoins increase, so will their users, resulting in faster crypto adoption.

Lending Fiat Liquidity

Another way for DeFi projects to help ensure coexistence between crypto and fiat is by allowing fiat liquidity pools. A fiat liquidity provider offers its fiat assets to a lending pool – their fiat assets are then used to give other people loans.

One of the existing platforms providing fiat liquidity options is the MELD Protocol. The network will allow investors and institutions to offer fiat liquidity by using the MELD app on mobile, desktop or Web. In the process, the investors will earn yields in high APYs. On top of lending fiat liquidity, this platform will also allow investors to use their line of credit, thus making crypto assets even more liquid.

Allow Investors to Earn Income with Fiat and Crypto

Savings accounts remain one of the most popular banking products, though falling interest rates and rising inflation mean that real yields on such accounts are zero or even sub-zero. DeFi projects offer similar savings products but provide higher earnings. DeFi yield farming is an excellent example: users lock up crypto tokens and get rewarded with more tokens daily, with nominal APYs often above 100%.

DeFi projects often require other investors to deposit their assets in a liquidity pool (savings account equivalent). The asset is then lent to someone else who offers another asset as collateral.

When lending cash, DeFi projects will often create a liquidity pool for depositing cash, with the cash then offered to others who collateralize crypto in return. However, in this case, the individuals depositing fiat will earn rewards in interest after the loan repayment.

Increasing Ease of Exchanging Crypto and Fiat

Providing better liquidity of crypto tokens is another way for the Defi space to co-exist with both crypto and fiat. Already, there are many crypto exchanges today offering liquidity for assets – however, it takes a lot of time to change the tokens back into cash with most of them. They are not highly-liquid by default.

However, DeFi projects can help streamline the issue. There are many ways through which this can be accomplished.

Expert Ken Olling, noted several options: “One is by providing the option to purchase crypto directly with bank accounts or other fiat options. Decentralized exchange platforms, for instance, can make it easy for investors to buy crypto using credit cards. By doing that, there will be ease in converting fiat to crypto.

Secondly, DeFi projects can provide instant cash access for those holding DeFi assets. The lending platforms can give crypto investors a line of credit. Moreover, Defi projects can link with banking institutions and other money changers. The result will provide more ease towards exchanging crypto to fiat and vice versa.”

Final Word

This guide has been exploring how DeFi can provide coexistence between crypto and fiat. There is a high need to ensure a good link between fiat and crypto for the two to co-exist. DeFi has already been playing a major role in linking fiat and crypto-assets.

DeFi networks provide essential services such as lending and yield farming, all of which can provide space for fiats. In lending, DeFi projects allow people to access fiat loans by using crypto as collateral. By doing that, they provide a pool for investors to offer fiat liquidity. There is no question that DeFi is a powerful new tool in the financial market to bring more money to more people in a safe, liquid and disruptive fashion.

April 23, 2022 0 comment

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