We hope your holiday season was brimming with joy, relaxation, and perhaps a touch of adventure. As we embark on a new journey in 2025, we're thrilled to welcome you to another year of Pharus Perspectives! We're eager to share insights, tips, and expert advice to make this year your most rewarding and prosperous yet.

 

In this edition, we're diving headfirst into some of the most pressing topics of the New Year:

 

Tax Planning for 2025: Get ahead with expert tips to optimize your finances and stay one step ahead of the game.

 

Tax Efficient Investment Feature: Discover the Corporate Class Structure for ETFs and Mutual Funds that allows for tax-efficient investing in taxable accounts.

 

Market Outlook for 2025: Discover what the future holds for the markets and how you can strategically navigate the landscape.

 

Capital Gains Tax Changes in Canada: Unravel the mysteries and implications of recent changes in capital gains tax laws and what they mean for you.

 

So, grab a cup of your favorite brew, settle in, and let's explore the opportunities and insights that await us in 2025. Here's to a year filled with success, health, and happiness!

 

Cheers to new beginnings!

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Monthly Markets Report

 

2024 Quick Market Recap: A Year of Growth

The year 2024 was outstanding for equity markets. This surge was driven by several key factors: the continuous development of generative artificial intelligence (Gen A.I.), widespread global interest rate cuts (with notable exceptions such as Japan and Brazil), and the outcomes of the U.S. elections. Despite the backdrop of regional conflicts in Gaza and Ukraine, the S&P 500 Index delivered impressive returns, surging by 25.0%, which outpaced most global indices. Similarly, the S&P/TSX posted a robust performance with an 21.6% gain.

The Concept of 'Animal Spirits'

Following the decisive victory of President-elect Donald Trump, the term 'animal spirits' became widely used by media outlets to explain the upward movement of equity markets. According to the Merriam-Webster Dictionary, animal spirits refer to "emotional feelings and desires that influence the economic behavior of consumers and investors." While this concept can be intriguing, it is also potentially risky for investors, as it often prioritizes the end goals over the methods used to achieve them.

2025 Outlook: Things to Watch Out For

What is Ahead?

As the New Year gets underway, what can we expect? It's impossible for anyone to know for sure, but based on the information at hand, we have some sense of direction. As growth and inflation trends are slowly returning to normal, meet a U.S. president who wants to turn things upside down. The path ahead is uncertain. However, taking a look back on the past year may help us see what's ahead in 2025.

The Bank of Canada

The Bank of Canada (BoC) cut its key interest rate by 50 basis points (bps) on December 11, 2024, as expected and it signalled a slower pace of rate cuts moving forward. This marked the fifth straight reduction since June and brings the central bank’s key rate down to 3.25% from this cycle’s peak of 5%. The BoC's benchmark rate now sits at the upper bound of the neutral rate range. The BoC estimates the neutral rate is somewhere between 2.25% and 3.25%, a rate that will neither help nor hinder economic growth.

The BoC said it expects economic growth next year to be weaker than previously forecasted due to the federal government’s reduction in immigration and the rise in unemployment. CIBC is forecasting four consecutive 25 bps cuts in 2025, starting at the January 29, 2025 meeting. We expect the rate to be 2.25% by the end of Q2 2025. Going forward, the BoC will be taking decisions one meeting at a time.

The U.S. Federal Reserve

On December 18, 2024, the U.S. Federal Reserve (Fed) cut interest rates by 25 bps to bring the target range for the federal funds rate to 4.25%-4.50% from the previous 4.50%-4.75%. The third consecutive reduction came with a cautionary tone about additional cuts in the coming years. The Fed indicated that it will probably only lower rates two more times in 2025 with two more cuts in 2026 and another in 2027. Most economists expect the Fed will hold rates at its January 28-29 meeting due to concerns about rising inflation risks.

The Fed will also have to deal with President-elect Donald Trump's fiscal policy. Mr. Trump indicated plans for tariffs, tax cuts and mass deportations that are likely to keep core inflation elevated in 2025. Fed Chair Jerome Powell stated that the economy is stronger now than the central bank had expected in September and policymakers can afford to be a little more cautious as they try to find neutral. CIBC Economics expects gradual 25 bps rate reductions going forward until the target range reaches 3.25%-3.50%.

Canadian Dollar

The Canadian dollar approached its lowest level this year, underperforming most of the currencies of the G10 nations. The Loonie slid more than 7% as Prime Minister Justin Trudeau’s government slipped into crisis after the unexpected resignation of his Finance Minister. The Loonie's decline is set against the backdrop of a weakened economy as officials struggle to come up with a plan to respond to President-elect Trump's 25% tariff threats on imported goods. The Canadian dollar is expected to recoup only a small fraction of its recent losses over the coming year. CIBC's scenarios for USD/CAD easing shows that rate spreads should bring the exchange rate back to about US$0.71 over the next 3-6 months.

Trump Tariffs

President-Elect Trump threatened to apply tariffs of 25% on all imports from Canada and Mexico as well as an additional 10% on Chinese goods. "The moves are needed to clamp down on migrants and drugs flowing across the U.S. border" Trump said. Following this announcement, the Canadian dollar fell to its lowest level in four years, below US$0.70. One of the hardest hit sector was automotive. Ford, GM and Stellantis all rely significantly on Canada and Mexico in their supply chains.

Tariffs could also lead to higher prices for Americans since tariffs work as a form of tax on imports. A tariff is a domestic tax levied on goods as they enter the country, proportional to the value of the import. A car imported to the U.S. with a value of US$50,000 subject to a 25% tariff, would face a US$12,500 charge. Tariffs are a central part of Trump's economic vision as he sees them as a way of growing the U.S. economy, protecting U.S. jobs, and raising tax revenue for the U.S. federal government. It’s not clear how long the tariffs would last if implemented.

Equity Market Dynamics and Forecast for 2025

Several factors are expected to shape the equity markets in 2025:

 

U.S. Equity Markets: The leadership of U.S. equity markets is likely to persist, influenced by themes such as tariffs, taxes, and immigration policies. These factors could drive earnings growth higher, although they may also contribute to inflationary pressures. The ongoing development of Gen A.I. is anticipated to further enhance corporate earnings as businesses continue to integrate its benefits.

 

Interest Rates and the Bank of Canada: The Bank of Canada is expected to continue reducing interest rates, although the pace and extent of these cuts may vary. Lower short-term interest rates are positive for the S&P/TSX, which is heavily weighted toward interest-sensitive sectors such as financials, real estate, and utilities. These sectors could see a valuation uplift as long as the economy does not enter a deep recession.

 

Global Challenges: Weak demand in China may continue to exert downward pressure on commodity prices. Additionally, high levels of government debt in certain countries remain a significant risk factor that could impact long-term interest rates.

 

Investment Outlook

As we look ahead to 2025, U.S. equity markets are expected to maintain their strength, although the pace of growth may be more moderate compared to 2024. The S&P/TSX is projected to offer attractive yield opportunities for investors, especially in comparison to bond yields. However, due to the relatively less robust Canadian economy compared to that of the U.S., the potential upside for Canadian equities may be more limited.

The Bottom Line

The investment landscape is dynamic, and forecasts made today may require significant adjustments as new policies and economic data emerge. With U.S. unemployment rates remaining low, the strength of the U.S. equity markets is likely to continue, albeit at a slower rate. Investors should expect the S&P/TSX to provide good yield opportunities, particularly given the anticipated downward trend in short-term interest rates in Canada. However, the Canadian equity market may see less growth compared to its U.S. counterpart due to economic disparities.

Fixed Income Dynamics and Forecast for 2025

Corporate Bonds

Canadian corporate bond markets continue to see an increased supply of sizable bond deals and investors have so far been buying up the debt. Despite increased supply, corporate spreads continue to tighten and recently reached their tightest level since January 2022. A greater number of companies that normally fund through the bank market are becoming new issuers funding in the fixed income market. This is a sign that banks are trying to protect their balance sheets and aren't lending to companies.

 

The momentum for Canadian corporate spreads will probably tighten further in the short term. Over the longer term in 2025, spreads are likely to widen. Canadian corporate yields are very attractive and that is attracting investors. Investors should be careful to avoid credits that could get hit in the future.

Provincial Bonds

Provincial bond spreads have tightened to benchmark Government of Canada bonds. Provinces continue issuing more debt with the decline in interest rates and expected acceleration in growth. The new year could see provincial spreads widen with new challenges such as increased budget spending, the threat of tariffs from the new Trump administration, the renewal of contracts with government workers and infrastructure spending.

 

Following its Fall economic statement, the Province of Ontario's credit rating was upgraded to AA- from A+ by ratings firm S&P, which cited better-than-expected economic growth and solid budgetary execution.

The Bottom Line

CIBC believes the BoC will continue to ease interest rates with a series of quarter-point cuts to take the overnight rate to 2.25% by mid-2025. The BoC has lowered borrowing costs by 175 bps, becoming one of the most aggressive rate cutters among the central banks of major economies. Governor Tiff Macklem expects inflation to be close to the 2% target over the next couple of years.

 

Fixed income markets may face some volatility if the Trump tariffs are implemented. Cautious investors should consult with their financial advisor if they have any concerns about their investment portfolio and making any investment decisions.

Portfolio Strategy: Potential Tactical Optimizations

As we usher in the new year, market volatility has been influenced by the recent political landscape in Canada and the United States, along with stronger than expected US Economy. Below is where we see potential optimizations for investment performance:

• International Equities: Reduce exposure to mitigate potential risks arising from trade negotiations and geopolitical issues.

• Canadian Equity Allocation: Reduce exposure to Canadian Equity allocation.

• US Equity Allocation: Boosting US Equity exposure could be beneficial with careful choices of sectors to benefit from expected market trends.

• Value Sector Positioning: Continue focus on sectors likely to outperform post interest rate cuts.

• Duration and Interest Sensitivity to Fixed Income: Carefully monitor and position fixed income duration as yields are being volatile since some Trump policies have the potential to increase inflationary pressures.

• Small-Cap Opportunities: Adding some exposure to small and mid-cap could help boost returns.

• Alternatives: Boosting exposure to Alternative assets like Private Equity and Private Credit would help long-term returns while Alternative Equity and Fixed Income strategies would help with smoothening out market volatility.

For our clients, we continue to monitor market and economic trends and adjust and optimize their portfolios on an ongoing basis in an effort to provide superior investment returns.

Market Performance – December 31st, 2024
Index	1 Month	3 Months	YTD	1 year	3 Years	5 years
S&P TSX	-3.3%	3.8%	21.6%	21.6%	8.6%	11.1%
S&P 500	-2.4%	2.4%	25.0%	25.0%	8.9%	14.5%
NASDAQ	0.5%	6.2%	28.6%	28.6%	7.3%	16.6%
MSCI EAFE	-2.3%	-8.1%	4.3%	4.30%	2.2%	5.2%
MSCI Emerg. Mkts	-0.1%	-7.8%	8.1%	8.1%	-1.5%	2.1%
MSCI World	-2.7%	-0.4%	17.0%	17.0%	4.70%	9.5%
FTSE Canada Bond Univ.	-0.7%	0.0%	4.2%	4.2%	-0.60%	0.67%

 

Source: Click here to access all market returns.

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Investment Feature

In this section, we educate the reader on different investments. We discuss and elaborate each idea over a couple monthly editions. This section is not to be taken as specific investment advice.

Unlock Tax Efficiency with Corporate Class Investment Structure

Are you paying high interest and foreign income taxes on your non-registered accounts? Have the new capital gains tax changes have you second guessing your corporate investment strategy? This common issue leads to the worst type of taxable distributions, causing financial strain and reducing your investment returns.

 

Imagine losing thousands of dollars each year simply because of inefficient tax structuring. Worse yet, paying more to the Canada Revenue Agency (CRA) than you should, when you could be investing that money back into your business or saving for your future.

 

Introducing Corporate Class: a tax-efficient investment structure designed specifically for incorporated professionals. By reallocating interest and foreign income to capital gains and eligible dividends, you can drastically reduce your tax burden and increase your net returns.

Who Should Consider Corporate Class?

Investors Using a Non-Registered Account: Canadian investors who have maximized contributions to registered accounts and TFSAs can benefit from tax deferral with non-registered accounts through investment strategies designed to avoid annual distributions, thereby only requiring taxes on capital appreciation when shares are sold.

 

Seniors: For seniors receiving Old Age Security (OAS), certain investment strategies help prevent OAS "clawbacks" by incorporating distributions into the total return rather than as taxable dividend income. This ensures OAS payments remain unaffected.

 

In-Trust Accounts: Investing for minors or dependents via in-trust accounts? Specific investment options minimize income attribution and taxation primarily on capital gains upon selling shares, protecting your nest egg for future generations.

 

Small Business Owners: To maintain tax-efficiency in corporate accounts, certain investment strategies offer a way to grow portfolios without impacting the Small Business Deduction (SBD) tax credit. This helps avoid reducing the SBD credit through passive investment income.

Comparison Assumption

The following example is for illustrative purpose only. In the example we compare a Bond ETF with a Corporate Class structure to a regular bond ETF. The two leading regular bond ETFs that invest in the broad Canadian bond universe have management fees of 0.09%. Meanwhile, Corporate Class structure would also have a management fee of 0.09% but an added fee of 0.14% due to its structure. This results in a total fee of 0.23% for the corporate class structure.

 

However, with corporate class, there are no distributions paid out hence no recurring tax burden. At the same time, instead of the distributions, the value of the corporate class fund grows resulting in Capital Gains which has more favorable tax treatment.  In the above scenario, the annualized after-tax return on the corporate class structure would be 2.12%, while the annualized after-tax return on the regular ETF would be 1.49%.

 

Key Takeaway

 

At Pharus Wealth Advsiory Group, we offer Corporate Class structured investments to clients or accounts where Tax Efficiency is important. Don't let inefficient tax structuring drain your resources. Embrace Corporate Class and start maximizing your savings today.

 

“The best way to predict your future is to create it." - Abraham Lincoln

 

Take control of your financial future. Contact us today to learn more about Corporate Class and how it can transform your financial landscape.

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CIBC Smart Advice Feature

Start 2025 off strong by asking the right questions.

Ready to revolutionize your financial strategy? Start the year by unlocking powerful insights through impactful conversations. Align your goals with the dynamic market landscape and unleash your full potential!

To make the most of your financial planning meetings in 2025, here are five key questions to ask your advisor:

1. New Tax Advantages: What are the new tax advantages this year, and how can I maximize these opportunities? Understanding and integrating new tax laws can significantly enhance your financial strategy.
2. Investing Strategy Fit: Considering my goals and the current market scenario, is my investing strategy still a good fit? This helps in exploring new opportunities that align with evolving goals.
3. Progress Towards Goals: Am I on track to achieve the goals we set? It’s important to understand how your portfolio aligns with your life’s objectives.
4. Preparation for Milestones: How can I get prepared for the next milestone or chapter in my life? Tailor your financial plan to ensure readiness for significant life events.
5. Plan Enhancements: What areas of my plan could use some enhancement or adjustments? Proactive planning ensures every element of your strategy works toward your financial well-being.

Asking these questions can help you stay ahead in 2025 and beyond, ensuring your financial strategy grows and adapts with you. Your advisor is a key partner in this journey, ready to coach you every step of the way.

 

Source: Click here to read the article.

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Financial Planning Feature

With Parliament Prorogued – How to Handle Capital Gains Tax Filing?

The article by Jamie Golombek discusses how to handle the uncertainty about capital gains in tax filing this year, and Practical approaches to tax changes left in limbo by Justin Trudeau resignation and government prorogation.

 

Here's a concise summary of the article:

 

• Capital Gains Tax Changes: Proposed increase in the inclusion rate from 50% to 66.67% for gains realized on or after June 25, 2024.
• Prorogation of Parliament: The prorogation has left the proposed tax changes in limbo, as all government bills in progress are effectively dead.
• Taxpayer Dilemma: Uncertainty about whether to apply the old 50% rate or the proposed 66.67% rate for 2024 tax filings.
• CRA Guidance: The Canada Revenue Agency (CRA) is administering the changes effective June 25, 2024, based on the proposals included in the Notice of Ways and Means Motion (NWMM) tabled on September 23, 2024.
• Practical Approach: Taxpayers are advised to consider the potential for the changes to be enacted in the future and apply the higher rate where applicable.

 

Source: Click here to read the detailed report.

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Pharus Resources Feature

Whether you’re planning for retirement, education, or your first home, it is best practice to maximize and utilize the appropriate registered contribution limits sooner than later to allow for greater compounding of returns.

 

Along with your contributions, it is important to look at the overall financial plan to ensure your contributions and investments are well-positioned and optimized for tax efficiency and are aligning with your goals. As a result, we published a detailed report about certain things to keep in mind for your income taxes and investment plan for 2025.

 

Source: Click here to read the detailed report.

 

To stay up to date on market events, news and reports, follow Pharus Wealth Advisory Group on our Social Media Pages. For Financial Literacy and Planning, visit Pharus Resources, where we upload timely articles on Financial Planning and Financial Literacy Resources.