Canadian Money Saver Jan 2007

Why I’m Sticking WithIncome Trusts

> An Economic U-Turn?

> Five Stingy Stocks for 2007

> Board Elections – Who to VoteFor and Why

> Portfolio Turnover

> Interest-Bearing Preferreds

> Achieving Financial Comfort inToday’s World

January 2007

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JANUARY 2007, VOLUME 26, NUMBER 4

Special Features

An Economic U-Turn?John Stephenson.................................. 5

New Income Trust Tax Lands Me in Hot WaterDerek Foster ........................................ 7

Emerging Market Investing – Part 2Richard Kang ....................................... 8

Understanding the BenchmarksLeonard Goodall ..................................11

Five Stingy Stocks for 2007Norman Rothery ..................................13

Board Elections – Who to Vote For and WhyGeorge Gutowski ..................................16

Portfolio Construction – Financial Services Bruce Campbell ..................................17

Why I’m Sticking With Income TrustsDavid Stanley .....................................19

Portfolio TurnoverKen Kivenko .......................................21

Interest-Bearing PreferredsJames Hymas .....................................23

Achieving Financial Comfort in Today’s WorldFrancis D’Andrade ................................26

A Full Suite of ETF ProductsJohn De Goey .....................................30

Personal File Management – Part TwoBrenda MacDonald ...............................31

RRIFs – The BasicsKirk Polson .........................................32

Learning about LifePatrick Longhurst ................................34

Planning For The DisabledEd Arbuckle ........................................36

Regular Features

ShareClubs .......................................... 4MoneyDigest .......................................14DRIPs with SPPs ..................................18Top Funds ..........................................28MoneySaver Events ..............................37San Miguel Lifestyle Conference .............38Ask the Experts ...................................39Investing for Your Future ......................41Member Services ..................................43

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The first well-known stockmarket disaster wasprobably the tulip bulbmania of the 1600s.

Later in that century Englishmenwere “investing” in oil from sun-flower seeds. And on it went.

More recently we have witnessed other investment fail-ures such as the Multiple Unit Resident Buildings (MURBs),Bre X, the dotcom bust, Labour Sponsored InvestmentFunds (LSIFs), art flip deals and alternative products likehedge funds.

The income trust meltdown triggered my thinking aboutsuch investor issues. (I admit owning and holding one in-come trust [Great Lakes Hydro Income Fund], which is inour company’s securities account. It was a good value buybefore the Halloween announcement and I still consider ita good investment for all the reasons why I initially boughtit.)

How can we avoid financial disasters? For me, I seekconstant reminders to support my investment style. I con-tinue to read books, for example, such as The Little Book ofValue Investing (Wiley, $23.99) to keep me on target.Christopher Browne, the author, is the managing directorof Tweedy, Browne Company LLC, one of the most highlyregarded investment firms in North America.

This statement from Browne is indicative of his reason-ing: “The big problem with emerging markets: they neverquite emerge. One day, it’s Russia, the next Mexico. Butinvariably that latest hot market in the developing worldturns cold, leaving investors shaking their heads.”

Again this year I resolve to buy value at the best price.This annual reminder is my firewall so I ignore all the hypeof the media and the promoters with their bogus figures,which too many investors bite on every time.

As more new structured/managed products are unveileddaily, their complexity and glorious promises build. All toooften the reality is that they will leave you with little chancefor real growth.

But for those of you who are more adventuresome thanme, you may be attracted to non-principal protected notes(NPPNs), constant proportion debt obligations (CPDOs),reverse convertibles and the always attractive donationschemes!

Have a prosperous 2007.


Canadian MoneySaver http://www.canadianmoneysaver.ca JANUARY 2007 5

The Skeptical Investor

An Economic U-Turn?

John Stephenson

Things seem to be going along swimmingly.Well, if you can forget about the latest incometrust meltdown. But in the weeks since theannouncement, the S&P/TSX index is actually

up 1.22%. Commodity prices remain relatively strong andthe outlook for the Canadian dollar is favorable. So, whyworry?

Lately, there has been a lot of concern about an eco-nomic slowdown in the United States. Commodity pricesslid hard as investors worried that a U.S. housing crashwould deflate the economy and take with it the strong glo-bal demand that commodities have been enjoying. With asmuch as 50% of U.S. consumer spending growth in recentyears dependent on home equity withdrawals (using yourhouse as an ATM), a crash in house prices would put aserious pinch in the purchasing punch that consumers areable to deliver. With consumption making up some 72percent of U.S. GDP, falling house prices could create anightmare scenario for the economy. But is the market right?

Perhaps. The news isn’t very good. House prices, whichrepresent some 48.5% of U.S. household wealth, appear tobe sliding with no end in sight. In some parts of the coun-

try, the inventory of homes for sale (number of homes forsale divided by average monthly sales) is over seven monthslong. This is translating into lower house prices and poorresults for the nation’s homebuilders.

With U.S. housing starts down some 19.8 percent year-over-year, builders and investors are beginning to fret.While residential construction accounts for only 5.5 per-cent of the U.S. GDP, it is the effect on pocketbook eco-nomics that has analysts worried. Not only has sentimentturned negative for builders, but also, recent data suggestthat the median house price has begun to tumble. Withconsumption so beholden on borrowing against inflatedhouse prices, can a slowing economy be far behind?

Signs of a broader economic slowdown are everywhere.Manufacturers are reporting weaker numbers and leadingeconomic indicators (new orders, yield curve, building per-mits, etc.) have turned negative for the first time in fiveyears. With the U.S. economy decidedly slowing, can aglobal recession be far behind?

No. For starters, growth in the rest of the world is notnearly as dependent on the U.S. consumer as you mightthink. China, Russia and much of the Middle East are all

Figure 1: With New Home Sales Falling Builder Sentiment Has Plunged

Source: Bloomberg

Figure 2: U.S. Leading Economic Indicators Turning Negative

Source: NBER



growing at a rapid pace. Europe, and even Japan, are start-ing to show some growth and very little, if any, of it isdependent on the U.S. China, which has been growingat more than 10 percent a year, produced some 6.5 mil-lion cars last year without exporting a single car to theU.S. In fact, exports to the U.S. accounted for only 8percent of China’s GDP and American markets meaneven less for other rapidly growing economies such asIndia and Russia. What all this means is that world GDPcould clock in at a healthy clip of 4.5 percent even withthe U.S. economy wheezing away.

This is good news for commodity players who will seehigher base metals and oil and gas prices in the yearsahead as global purchasing continues unabated. Com-modity pricing is influenced by many factors, but in theend, the only factor that really matters for higher pricesis strong demand and struggling supply. In an increas-ingly global world, demand will come from Asia, notAmerica.

But the news may not be all that bad at home. With aslowdown looming, the U.S. Federal Reserve (U.S. centralbank) will have little choice but to cut interest rates to spurgrowth. That’s good news for the stock market and inves-tors alike.

Not only that, but wage gains are up some 8 percentthis year, as stock options and bonuses have started to kickin. While consumption is likely to weaken if U.S. houseprices continue their slide, it should still keep pace withincome growth. If the U.S. dollar weakens in the face oflower interest rates, the competitive positioning of U.S.firms could improve (exports are cheaper) which shouldimprove the balance sheets of corporate America. Much ofcorporate America cut back drastically on spending afterthe technology bubble burst and is flush with cash, whichshould allow many companies to weather an eventual eco-nomic storm. While the economy is likely to slow in 2007,it may not crash—good news for investors and consumersalike.

But falling interest rates is great news for stocks, par-ticularly interest-rate sensitive stocks. In a declining rateenvironment, companies that have stable long-term con-tracts or regulated business models tend to soar. Even inslow economic times, consumers are still going to need heat,food and shelter. Consumer staples, utilities and financialsare all likely winners if the faltering U.S. housing marketcauses the Federal Reserve to slash interest rates to preventa hard landing for the economy.

For Canadian investors the story is mixed. If the U.S.slows, this could harm our exports. But a slowing Ameri-can economy could mean that the Bank of Canada has nochoice but to lower interest rates to keep our currency fromrising too fast against the greenback. While Western Canadahas been enjoying the upswing from a global commodities

boom, central Canada has been suffering with the effectsof the high dollar, which has put a crimp in our exports.

Investors looking to profit from a U.S. slowdown shouldconsider allocating a greater proportion of their investmentdollars toward utilities and other interest-rate sensitive stocksas interest rates are more likely to fall than rise in the monthsand years ahead. Investors with a longer time horizon canuse the current commodity price weakness, particularly inenergy, as an opportunity to pick up some great quality oiland gas names that are trading at a discount.

John Stephenson, MBA, CFA, FRM, Founder of Report onMoney.com, Publisher of “Money Focus”, Senior Vice-President and Portfolio Manager, First Asset InvestmentManagement Inc., 95 Wellington Street W, Suite 1400,Toronto, ON, M5J 2N7 (416) 640-3283 or (877) 642-1289, [email protected]

SCHEDULE OF KEY INTEREST RATEANNOUNCEMENTS AND PUBLICATIONSFOR 2007

January 16 - Interest rate announcement

January 18 - Monetary Policy Report Update

March 6 - Interest rate announcement

April 24 - Interest rate announcement

April 26 - Monetary Policy Report

May 29 - Interest rate announcement

July 10 - Interest rate announcement

July 12 - Monetary Policy Report Update

September 5 - Interest rate announcement

October 16 - Interest rate announcement

October 18 - Monetary Policy Report

December 4 - Interest rate announcement

MoneyTips

Figure 3 – Falling Interest Rates A Boon For Stock Markets

t

Source: Scotia Capital Inc.



Stop Working

New Income Trust TaxLands Me in Hot Water

Derek Foster

On October 31, income trust investors got atrick instead of a treat from the federal gov-ernment. In spite of a promise not to tax in-come trusts, a new taxation plan was an-

nounced. The next day, many trusts’ market prices plum-meted between 15-20%.

I retired at 34 by buying steady dividend-paying, blue-chip stocks with a very healthy dose of high-yielding in-come trusts. This surprise announcement wiped over$30,000 off my portfolio in a single day. However, withmy strategy, I don’t focus on my portfolio value as I knowit will go up and down like a yo-yo. I focus on the cashbeing paid to me on a regular basis—this is the income Ineed to fund my very early retirement.

With the announcement, the ability of trusts to pay theirgenerous distributions has been reduced. Starting in 2011(existing trusts have a four-year grace period), they will paytaxes, which will reduce the cash they have available to sendto unit holders. The tax rate at that time will be 31.5%(from what I’ve read), so almost a third less cash will beavailable.

How did I react to all this? With lightning speed, I leaptto action and did...absolutely nothing. There was no chancefor anyone to sell before the plunge. The underlying fun-damentals of the income trust model had changed, but thesechanges had already affected market prices. There was nopoint in selling. I called my MP, the PMO, and JimFlaherty’s office, and my opinions were duly recorded, butI’m not holding my breath waiting for action. The rest ofthe day was spent taste-testing my kids Halloween treats tomake sure they were “totally safe for their consumption”—as I explained it to them.

Then what? The next step was to examine the universeof trusts to see if I could perhaps find some oversold gemsavailable through all this. So I went to the Dominion BondRating Service website (www.dbrs.com) and clicked on “In-come Funds”. I recorded all the names of trusts that had astability rating of STA-1 or STA-2 (the higher the number,the more stable the distributions are according to DBRS).I found some familiar names—many trusts I own and men-

tion in my book, “STOP WORKING: Here’s How You Can!”But some prices still seemed very pricey. For example,Pembina Pipelines had fallen from almost $18/unit toaround $13/unit (a pretty sizeable retreat). But I had boughtit for $7.75 during the tech bubble, so I was loathe to payalmost twice that price for more units. On I went until Ifell into hot water, or more precisely waterheaters.

For anyone who is familiar with the strategy I used toretire at 34, they’ll see the appeal of this type of businessright away. Simple, a recession-proof business with no fancytechnological breakthroughs coming that can confuse me(which isn’t too hard on most days). Regardless of the sea-son, economy, fashion trends, whatever, people will use hotwater. I had a 15-year-old heater burst a few years ago andI just called the company, and they replaced it right away.Simple.

I examined Consumers Waterheater Income Fund a lit-tle closer. The cost of a waterheater is about 40 cents a day,so it’s not a huge expense for consumers. The number ofwaterheater rentals has increased over the last 16 years at arate of 4%/year, and they service areas of growing popula-tion mostly in southern Ontario. So the number of cus-tomers should keep growing. They should also be able toraise rental prices by the rate of inflation over time.

Over the last few years, the distributions were $1.05 in2003, $1.067 in 2004, $1.12 in 2005, and $1.19 projectedfor 2006. In 2007, if monthly distributions remain con-stant, distributions will be $1.23. There’s been slow butsteady growth. Meanwhile, the unit price fell from around$16 to around $12 after the announcement. I bought someunits on November 3 at $12.65.

Any time one buys stocks or income trusts, there arealways risks. On many occasions I’ve single handedly proventhe second part of Einstein’s assertion when he said, “Theonly two infinite things are the universe and human stu-pidity.” I’m not a professional stock picker or analyst, buthere was my thinking on this.

With $1.23 in distributions and a unit price of $12.65,my immediate yield will be 9.7%, taxed like interest in-come. If I assume prices rise 2%/year, and volume also rises



at 2%/year (half the historical rate of growth), then I canassume the trust will earn roughly 4% more each year forthe next 4 years. If they also raise the distribution by thatamount, then the payout will grow from $1.23 now, to$1.44 by 2011 (when the announced taxes kick in). Thentax will be 31.5% (from what I read), so a 31.5% reduc-tion is (1.44 x .685 = 99 cents). With approximately a 99cent annual distribution in 2011, the yield on my purchaseprice will be 7.8%. Now since the government wants to“level the playing field between income trusts and corpora-tions”, I would expect this new reduced distribution to re-ceive favourable tax treatment like dividends currently do(with the dividend tax credit).

With this investment, I expect to receive a regularly taxed9.8% yield which should rise to 11.5% by 2011 (when thenew taxes kick in). Then I will get a tax-advantaged 7.8%yield which should rise slightly faster than the rate of infla-

tion. The unit price should also be supported at this lowerlevel as the new taxation rules have already been announced.With the first of the baby boomers hitting 60 this year, Ifeel the demand for yield will not disappear as people willshift money from more speculative stocks into stable cashgenerators that are boring but stable.

Although I am not happy at all about the government’sannouncement, I’m hoping to find a silver lining. I mademy decision with imperfect information and I could beproven wrong, but that’s the nature of investing—low riskis never no risk.Derek Foster, Author of “Stop Working: Here’s How YouCan”, Box 29131, 3500 Fallowfield Rd, Unit 3, Nepean,ON, K2J 4A0 (888) 686-7867 or (613) 823-2143,[email protected]. Derek’s book is discounted formembers at $14.95.

Building A Better Portfolio

Emerging MarketInvesting – Part 2

Richard Kang

L ast month I covered emerging market in-vesting in broad terms. The decision as towhether emerging market (EM) investmentsshould be considered a long-term hold or not is

dependent on each investor’s risk tolerance. Because of itsinherent volatility, I would tend to see EM positions as“non-core” holdings and thus I would not apply a truly“buy-and-hold” mentality. For investors with a truly long-term profile (such as an investor in their 20s investing in anRSP), and with little resources to continually study the art/science of investing, I would then argue that buying andholding a broad emerging market fund makes sense.

As a market participant who prefers the use of exchange-traded funds (ETFs), I will simply comment here that formany investors who want to “buy” the emerging marketsin one trade, one of the most common means is by way ofthe iShares MSCI Emerging Markets Index Fund (ticker:EEM) traded in the U.S. However, for more sophisticatedinvestors, I would hope to see in the near future, emerging

market ETFs that have various regional exposures to emerg-ing markets. Thus, I would like to see an ETF for Central/Eastern Europe, another for southeast Asia and another forthe Mideast/Africa. An ETF already exists for Latin America(ticker: ILF). Having a strategic asset allocation plan toemerging markets using this sort of regional context is idealespecially for larger portfolios. Although ETFs for all theseregions don’t exist, closed-end funds traded in the U.S. maybe available.

Getting back to basics, and with what we know to becurrently available, I focus here on two ETFs and two mu-tual funds that give most investors the means to have broademerging market exposure. Even holding any two of thesepositions give added broad international exposure that ismore than enough to augment international equity posi-tions as found in mutual funds or ETFs, such as the iSharesCDN MSCI EAFE Index Fund (XIN).



Vanguard Emerging Markets ETF

Emerging markets have been simply hot over the pastfew years. Your investment in the broad emerging marketswould have doubled from early 2003 to early 2004. Itwould have doubled again from the summer of 2004 toearly 2006. The problem is that with significant returnscome significant risks. Over the past three years, emergingmarkets have experienced drawdowns of roughly -18%,-13% and -26%. These price drops usually occur quicklywithin a two-month period, the last one occurring over a4-week period in May/June 2006. But consider this: al-though emerging markets were down roughly 26% fromthe peak in early May to the bottom in mid-June 2006, allof the losses were erased when the markets rose thereafter.Specifically, new highs in VWO were hit in the first weekof December although at the time of writing there has beensome pullback since hitting those new highs. Clearly, inthe current environment patient intermediate-term inves-tors are being rewarded.

Still, for many investors, a 26% hit is just not acceptableand thus tactical trading may be deemed appropriate. Thisdoes not just apply for emerging markets. As I mentionedin part one of this article last month, the Nasdaq and theTSX Composite experienced massive drawdowns in 2000-2002, both far worse than a drop of 26%.

Many investors may be aware of the iShares ETF foremerging markets (ticker: EEM). Note, however, that Van-guard recently changed the mandate for its emerging mar-ket ETF (ticker: VWO), so that it now tracks the MSCIEmerging Market Index just as EEM does. Thus they’rethe same fund. There are only two significant differences.One: EEM started trading in February 2003, VWO inApril 2005. Two: EEM has a 75bps MER. VWO has a30bps MER. The math to compare costs is simple and myrecommendation is to choose VWO. There is an impor-tant rule of thumb here: For any iShares ETF you are con-sidering to hold, take a look to see if Vanguard has some-thing similar because their fees are often much lower.

Shares MSCI Pacific ex-Japan Index FundRight after introducing my rule of thumb, I now give an

example of how it does not apply. Vanguard has a PacificETF (VPL) which may seem similar to its counterpart fromiShares, the MSCI Pacific ex-Japan Fund (EPP). However,the Vanguard ETF has nearly 75% in Japan. Ninety percentof the fund is in just Japan and Australia. Vanguard has thePacific ETF as well as a European ETF to allow investors totilt between the two as opposed to holding them altogether inan EAFE fund such as XIN. I recommend EPP because itdoes not have Japan, which I will assume investors alreadyhold in a core international equity holding like XIN or intheir international equity mutual funds.

EPP has roughly two-thirds in Australia, about 20% inHong Kong, 10% in Singapore and 2% in New Zealand.With nearly a quarter of the fund in banks, you have adecent value tilt that is needed in this relatively low-yieldworld. Its next largest sector weightings are in materialsand real estate, each with roughly 16%.

To me, this fund is a good holding because it has almostno overlap with VWO, yet has close economic ties to Chinasimply due to geography. With an MER of just 18bps, I’dlike to see Vanguard revise its mandate so it, too, tracks theMSCI Pacific ex-Japan Index. Note EPP has an MER of50 bps. It’s important to understand that costs aren’t eve-rything but when it comes to simple market cap-weightedexposure, Vanguard is the one to watch. I recommend EPPas a good addition on top of broad international/emergingmarket exposure. However, keep an eye on VPL to see ifVanguard makes the mandate changes as I have suggested.My feeling is that they won’t.

Although this article attempts to discuss emerging mar-kets, some readers may wonder how EPP fits the topic.Again, I discuss EPP here because of the regional proxim-ity to China. This fund is a partial play on China.

Excel India FundAs much as I extol the virtues of ETFs, I’m not a devout

follower. There’s no doubt, I’ll use ETFs or passive-ori-ented means whenever I can. But I’ve got to believe thatunlike the U.S. with its thousands of CFAs, MBAs, PhDswatching and gauging the markets, places like India andChina are areas where opportunities to exploit market in-efficiencies are more readily available. Frankly, in the caseof India, there is simply no ETF-based solution. In fact,there are not many options for investors interested in In-dia.

I believe that the Excel India Fund is the only fund inCanada whose focus is entirely on India. The actual port-folio manager, Birla Sun Life AMC Ltd. is based in Mumbai,the financial centre of India, which is important to me.Birla is 50% owned by Sun Life and has US$4.0 billion inAUM (Assets Under Management). The fund started inearly 1998 in what was a difficult investing environment.However, its long-term performance is excellent with a18.8% annualized return (to November 30, 2006) sinceinception, far better than its benchmark, the Sensex Index.Its YTD return of 27% and 3-year annualized return of35% (again, to November 30, 2006) is simply fantastic.The fund has underperformed the index over the past twoyears and especially in 2006. This could be simply due tothe fact that the Sensex is heavily weighted in an energycompany (12%) and an industrial company (8%) whichhave performed well. Its bias is more towards conservativevalue, holding roughly 40 positions through a bottom-upprocess. When thinking of India, you would think that IT



MoneyTipsTrailer Fees on ETFs!

The new Claymore funds willcharge 75 basis points morethrough their advisor-class units.These trailer fees will be embed-

ded compensation to advisors passed on to investorsthrough the management fees. The common-class unitswill not carry this advisory cost.

(Internet Technology) would be the top sector holding. Infact, it is third behind cash and financial services. I wassurprised to see a 16% holding in cash as of July 31st butconsidering the long run-up in the Indian markets over thepast five years or so, piling up some cash reserves seemsprudent. Main themes for the fund include: infrastruc-ture, personal consumption and the IT industry.

The major flaw of active management is the fact thatmanagement fees and the costs of trading are a drag onperformance. This fund has a 3.48% MER. Consideringthis is a unique space, the high MER is not that surprising.I’d love to see some competition for Excel Funds to putsome pressure to lower fees.

India is probably the best long-term story out there. TheSensex’s correlation with the Dow and TSX Composite are0.3 and 0.4 respectively which are good. As long as India isable to consume, and increase consumption of what it pro-duces, the economic story should remain intact. Any re-duced reliance on exports to the U.S. and the western worldonly strengthen the argument. My feeling is that this lineof reasoning is stronger with India than it is with China.

Excel China FundDespite my preference for India over China, the simple

numbers show that China can not be ignored. When youconsider the nation’s economic ambitions, in addition toits Olympic and space programs as other examples of itsnational pride, it’s clear they are on a mission to dominate.A seat on the UN security council also doesn’t hurt.

There is a China ETF (ticker: FXI, YTD return: 60% inUSD as of December 12, 2006) but I feel better with EPPto capture the regional trading area as well as the ExcelChina Fund for direct exposure. I recall a presentation byProfessor Marvin Zonis (Chicago) who wrote The KimchiMatters, one of the best books on emerging markets. Hementioned that most or nearly all of the companies in FXIare state controlled. This is an obvious concern as deci-sions by board of directors and shareholders is one of thefoundations of capitalist democracy.

The Excel China Fund is invested primarily in HongKong and Singapore-listed Chinese companies, where theregulatory framework is on par with the West—only 4%of the fund is invested in Shanghai-listed companies. Thegrowth strategy lies in identifying companies in the mid-cap segment that are underresearched or underloved, andwhose earnings are breaking out. The fund managers areactively researching companies that will benefit from inter-nal economic reform, planned government expenditure, taxreforms and other centrally planned initiatives, as well fromtime-to-time some trading opportunities in large cap com-panies. Key thematic areas of focus for the fund are agri-cultural reforms, infrastructure, consumption growth, andcommodities.

Hamon Investment Group is the portfolio manager andthey are based out of Hong Kong. With over US$700 mil-lion in AUM they were established in 1989 and have beenmanaging a similar mandate for Dreyfus Funds in the U.S.since 1998.

Since its inception (June 2003), the Excel China Fundhas averaged roughly 19% per year and its YTD return toNovember 30th is 58.4%. Sounds good, but like emerg-ing markets in general, this thing comes with volatility.From February 2004 to October 2005, the fund has a long,drawn-out fall of 24%. This summer, the fund fell as muchas nearly 6%. For long-term investors, there’s nothing wrongwith getting in now. However, I would suggest waiting tosee what happens in the next few months. If U.S. consum-ers decide to curtail spending, China and its exportingmachine might be of concern.

Like the India fund, this one is expensive with a 3.95%MER but with limited choices and the cost for having localtalent, you’ll have to weigh the pros and cons. For some-one like me who puts about 90% of a portfolio in ETF-type instruments, putting no more than 5% in India andChina makes the burden of management fees rather insig-nificant.

In a world of increased correlations, especially betweendomestic equities and international equities, focusing onemerging markets, although not perfect, may provide di-versification benefits. Due to their volatility, allocations tothese two markets should not be any more than 10%. In-terestingly, China and India have roughly a 0.3 correlationbetween them. Even more reason to have exposure to bothmarkets.

Excel Fund Management has been managing funds since1998 and currently has $340 million in AUM. No othercompany in Canada has a similar focus to emerging mar-ket investing like Excel Funds. This is an investment firmto watch.

Richard Kang, President and Chief Investment Officer,Meridian Global Investors, 162 Cumberland Street, Suite300, Toronto, ON, M5R 3N5, (416) 963-7378,[email protected].



No-Load Portfolios

Understanding theBenchmarks

Leonard Goodall

In October 2006 major U.S. newspapers carried head-lines announcing “the stock market” had reached newall-time highs. The details of these stories indicatedthat the Dow Jones Industrial Average had finally

passed above the historic high of 11,722 which it hadreached on January 14, 2000. In fact, the Dow went on tomove above 12,000 that same month. This raises the ques-tion of whether the Dow is really the best indicator of “thestock market” in the U.S. There are literally dozens ofbenchmarks, or indices, that measure some aspect of vari-ous stock markets. They often carry names like Dow, Stand-ard and Poor’s, Russell or Wilshire. I will discuss five of themajor ones here: (1) the Dow Jones Industrial Average, (2)the Standard and Poor’s 500, (3) the Russell 2000, (4) theWilshire 5000 and (5) the MSCI EAFE.

Dow Jones Industrial Average

Charles Dow began publishing a list of stocks in the1880s, and by 1896 it had evolved into two separate lists,an industrial list and a transportation (mainly railroads)list. The twelve stocks in the industrial list became theoriginal Dow Jones Industrial Average. It included suchcompanies as American Cotton Oil, American Tobacco,Chicago Sugar and U.S. Rubber. The only stock from theoriginal list that is still in the average today is General Elec-tric. That first list of twelve has grown to a list of 30 stockstoday.

The Dow is a price-based average. Originally the pricesof the twelve stocks were totaled and divided by twelve.The first recorded average price in 1896 was 40.94 (com-pared with 12,000 today). Because of the replacement ofsome stocks with others, as well as stock splits and divi-dends, the formula for calculating today’s average is muchmore complicated. It changes frequently as stocks split orpay stock dividends. The formula is published regularly infinancial publications such as the Wall Street Journal.

Investing in the Dow - Investors wanting to invest in anindex fund designed to reflect the performance of the Dowcan easily invest in an exchange-traded fund called the Dia-

mond. It trades on the American Stock Exchange with thesymbol DIA. Some investors use a theory called the “Dogsof the Dow.” This theory advocates investing in the tenstocks in the Dow with the highest dividend yield, andrebalancing the portfolio annually to keep the ten that cur-rently have the highest dividend. This theory is based onthe idea that dividends give a boost to a portfolio, but alsoon the idea that companies may have a high dividend yieldbecause their prices are depressed and ready for a rebound.More information on this theory can be found atdogsofthedow.com.

Standard and Poor’s 500Although the Dow is the best known index among the

public and the one that gets the most media attention, theStandard and Poor’s 500 is probably the most widely fol-lowed by economists and investment analysts. While theDow has just 30 stocks, the S&P 500 includes 500 of thelargest, most liquid, most widely held U.S.-based compa-nies. It is not precisely the largest 500. An index commit-tee at Standard and Poor’s makes some adjustments to as-sure that the companies are liquid, widely owned and rep-resent the various economic segments of the market. Ifthose who watch the U.S. markets most closely were askedto choose just one index to represent “the stock market”,they would most likely choose this one.

The index is based on market capitalization, so the larg-est companies have the greatest influence on the index cal-culation. For example, in 1999 the S&P 500 was up 19.5%in spite of the fact that over half the companies in the indexhad declined in price during that year. Since the largestcompanies were up in price in 1999, they were able to movethe whole index up.

Investing in the S&P 500 - An exchange-traded fundknown as the Spider is designed to track the performanceof this index. The fund trades on the American Stock Ex-change with the symbol SPY. Another fund, iSharesS&P500 (IVV), also tracks the index and trades on the NewYork Stock Exchange. Since both of these funds trade onthe exchanges, they can be purchased by any investor with-



out regard to residence or citizenship. One of the largestU.S. mutual funds, Vanguard S&P 500 Index (VFINX),was one of the first index funds to be created and is basedon this index. The Rydex S&P 500 Equal Weighted Fund(RSP) trades on the American Stock Exchange and offers anew approach to investing based on this index. As the namesuggests, it invests equally in each stock rather than basingits investments on the capitalization of each company.

Russell 2000There are several Russell indices, with this one probably

being the best known. The Russell 3000 is the most com-prehensive of the Russell indices, and its 3000 stocks con-stitute about 98% of the market capitalization of all pub-licly traded companies on the U. S. markets. The Russell2000 is made up of the smallest 2000 stocks in the Russell3000 index. This index is often used to measure the per-formance of mid-cap, and to a lesser degree, small-cap com-panies. It includes many companies that would be consid-ered small, but not the smallest since the bottom 2% areexcluded. The index is capitalization-weighted, so the largercompanies have a greater impact on index performance.

Investing in the Russell 2000 - Investors can invest inthe Russell 2000 through either an exchange-traded fundor a traditional mutual fund. The iShares Russell 2000Fund (IWM) is an ETF that trades on the New York StockExchange. The Vanguard Small Cap Fund is a traditionalmutual fund that attempts to reflect the performance ofthis index. Because these funds will not have the stabilitythat often comes from including large established compa-nies in a portfolio, investors in either of these funds shouldexpect to have somewhat more volatility than the indicesdiscussed above would provide.

Wilshire 5000The Wilshire 5000 is generally considered to be the most

broad based and comprehensive of all the U.S. market in-dices. Established in 1974, it attempts to include all pub-licly traded U.S.-based companies. Although it keeps thenumber 5000 in its name, the index currently includes over6000 stocks and constantly grows as the economy expands.The index is based on market capitalization, so even thoughall companies are included, the largest ones have the great-est influence on index performance.

Investing in the Wilshire 5000 - Some investors wantto implement a very simple plan of owning just one all-encompassing stock fund and one bond fund. These indi-viduals often choose a stock fund based on the Wilshire5000, and they have several good alternatives to choosefrom. An ETF, the Vanguard Total Market Fund (VTI),trades on the American Stock Exchange. In addition, thereare at least three traditional mutual funds that track thisindex: Fidelity Spartan Total Market Fund (FSTMX), T.

Rowe Price Total Market Fund (POMIX) and VanguardTotal Market Fund (VTSMX).

MSCI EAFEAlthough this fund does not track U.S. stocks, it is often

used by investors from Canada and the U.S. to help build theinternational component of their portfolios. It is the bestknown of the indices maintained by Morgan Stanley CapitalInternational. The EAFE identifies Europe, Australasia andthe Far East for the focus of this index. It represents the majorcompanies of developed countries outside North America. Itis based on the country indices of 21 countries that includeover 1100 companies with a total capitalization of over US$10trillion.

This is by no means the only global or international index.Dow Jones has similar ones, and there are others based inEurope. This is the best known one in North America, how-ever, and the one that gets the most coverage in the press here.

Investing in the MSCI EAFE - North Americans wantingto add a core international index fund representing the rest ofthe world to their portfolios have several good choices. TheETF, iShares MSCI EAFE (EFA), trades on the AmericanStock Exchange. For those who prefer, and are able to investin, traditional mutual funds, two good choices are VanguardDeveloped Markets Index Fund (VDMIX) and Fidelity Spar-tan International Index Fund (FSIIX).

Index Fund InvestingRegular readers of MoneySaver are well aware of the ad-

vantages of investing in index funds. They are discussedfrequently in these pages, and various authors have pointedout their advantages. The funds identified above showthat index investing can involve a variety of strategies. Ihave a retirement account in which I invest equal amountsin a large-cap (S&P 500), a small-cap (Russell 2000), abond and a real estate index fund. Once a year I rebalancethe account to be sure that each index continues to repre-sent about 25% of the total. You can develop your ownstrategy for index fund investing.

It is fortunate that there is at least one ETF tracking eachof the indices above. This means that Canadians or otherswho may have difficulty purchasing traditional U.S. mutualfunds can still participate fully in investing in any of the indi-ces discussed here.

Most investors will not want to do all of their investingin index funds, but a well diversified portfolio of variouskinds of index funds is a good start for a successful invest-ing strategy.

Leonard Goodall, PhD, CFP, Co-editor of “No-LoadPortfolios”, 6530 West Darby Avenue, Las Vegas, NV,89146 (702) 871-4710, [email protected]



The Stingy Investor

Five Stingy Stocks for2007

Norman Rothery

I look for two qualities when hunting for bargain stocks:they must be cheap and they must be relatively safe.Not surprisingly, it is often difficult to find stocksthat are both cheap and safe.

When it comes to cheap, I usually seek stocks with lowprices in relation to book value, earnings, sales, or cash flow.It is best to initially search for cheap stocks using only oneor two of these fundamental values because each search re-veals a slightly different list of stocks. When composing myannual stock list for the Canadian MoneySaver I stick tostocks with price-to-sales ratios of less than one.

Stocks with low price-to-sales ratios can be tricky, whichis why I also want a degree of safety. Because large firmstend to be more stable than smaller firms, I only considerstocks in the S&P 500.

More importantly, companies with little debt and lotsof assets are much stronger than firms living on the edge ofinsolvency. Three ratios are very useful when searching forcompanies with little debt. Perhaps the most important isthe debt-to-equity ratio which is calculated by dividing acompany’s long-term debt by shareholder’s equity. Theamount of debt that a company can comfortably supportvaries from industry to industry but debt-to-equity ratiosof more than one are generally too high. I prefer to con-sider companies with even less debt and look for debt-to-equity ratios of 0.5 or less.

Next up is the current ratio which is calculated by dividinga company’s current assets by its current liabilities. Currentassets are defined as assets, such as receivables and inventory,

that can be turnedinto cash within thenext year. Currentliabilities are pay-ments that the com-pany must makewithin the next year.Naturally, an inves-tor would like acompany’s currentassets to be much

more than its current liabilities and I prefer companies withcurrent assets at least twice as large as current liabilities. Afterall, you can be pretty sure that the company’s creditors willdemand prompt payment of the current liabilities. On theother hand, some of the current assets, such as a firm’s inven-tory, might not actually be worth as much as managementexpects.

Finally, a company’s earnings before interest and taxesshould be large in comparison to its interest payments. Theratio of earnings before interest and taxes to interest pay-ments is called interest coverage and I like this ratio to betwo or more. But it is important to remember that a debt-free company does not make interest payments and wouldn’thave an interest coverage figure. Nonetheless, debt-freefirms should not be excluded from consideration.

While the debt ratios that I’ve selected are very usefulwhen determining a firm’s ability to shoulder debt, theyare not perfect. Some long-term obligations may not befully reflected on a company’s balance sheet and are, sensi-bly enough, called off-balance sheet debt. Regrettably, off-balance sheet debt is often ignored but it can be a source ofconsiderable consternation. For instance, sneaky legal li-abilities can sideswipe what might otherwise be a good in-vestment. As with all screening techniques, be sure to em-bark on a more detailed investigation of each stock beforemaking a final investment decision.

TABLE 1 - STINGY STOCK CRITERIA

1. A member of the S&P 5002. Debt-to-Equity Ratio less than or

equal to 0.53. Current Ratio of more than 24. Interest Coverage of more than 25. Some Cash Flow from Operations6. Some Earnings7. Price to Sales ratio of less than 1

Table 2: Past Performance

Period* Stingy Stocks S&P 500 (SPY) + / -2001 – 2002 -1.9% -22.1% 20.22002 – 2003 33.8% 23.0% 10.82003 – 2004 29.8% 13.4% 16.42004 – 2005 29.2% 8.2% 21.02005 – 2006 28.9% 12.6% 16.3Total Gain SinceInception 183.6% 32.3% 151.3

Source: quote.yahoo.com. *Indicates the time between articles andnot calendar years.



Continuing the safety theme,I also want a company to showsome earnings and cash flowfrom operations over the lastyear. After all, it is less likely thata business will go under when itis profitable and has cash com-ing in the door.

All of my criteria are summa-rized in Table 1 and I’ve used thesame criteria over the last fiveyears to find interesting valuestocks. Table 2 summarizes the strong past performance ofthe method. Since a rocky start in 2001, the stingy stockshave provided a total gain of 183.6% assuming that theold stocks were sold and the new stocks purchased eachyear. In comparison, the S&P 500 (as represented by theSPY exchange-traded fund) lagged by 151.3 percentagepoints over the same period.

Despite outperforming the S&P 500 by at least 10 per-centage points a year, I should hasten to add that I don’texpect my method to routinely produce stellar results. Ifully expect that it will encounter a down year, both com-pared to the S&P 500 and absolutely, from time to time.

Bargain hunting was a little more difficult this year withonly five stocks passing the stingy test, down from eightstocks last year. This year’s crop of stingy stocks is shownin Table 3.

I hope that I’ve piqued your interest, but be sure to fullyinvestigate each stock, and talk to your investment advisor,before investing. Remember that, although the stingy stocksare relatively safe, there is no such thing as a risk-free stock.

Norman Rothery, PhD, CFA, Financial Consultant, DanHallett & Associates Inc., 430 Pelissier Street, Suite 501,Windsor, ON, N9A 4K9 (416) 243-9580,[email protected]

TABLE 3 - STINGY SELECTIONS FOR 2007

Share Price / Debt to Current Interest Price / DividendCompany Name Price Sales Equity Ratio Coverage Cash Flow P/E YieldAshland (ASH) 67.99 0.59 0.03 2.1 366.0 14.7 26.9 1.6%

Dollar General (DG) 15.46 0.54 0.31 2.1 23.7 9.7 16.2 1.3%

Genuine Parts Co. (GPC) 46.61 0.77 0.18 3.1 31.4 14.9 17.4 2.9%

Leggett & Platt (LEG) 23.69 0.77 0.47 2.6 9.1 9.4 16.1 2.9%

Liz Claiborne (LIZ) 42.62 0.90 0.36 2.4 12.7 10.9 17.1 0.5%

Source: www.stingyinvestor.com, www.msn.com, December 2, 2006

THIS COLUMN OFFERS EXCERPTS FROM PUBLISHED SOURCES TO PROVIDEOTHER VIEWPOINTS.

Trusts After The TaxThe silver lining here is

in three parts. First, there’sno change to trust taxationfor four years, which leavesplenty of time to garnerhigh income. And theremay be some favorabletweaking of the rules.Second, well-run trusts arealready pricing in dividendcuts of 30 percent plus thatstill look unlikely. Andmany trade with valuationsbelow those of their non-trust peers, so they won’t

lose by converting tocorporations.

Third, four years leavesplenty of time to minimizefuture tax bills. And manytrusts are far less exposedthan is widely believed. Thekey is return of capital(ROC): the higher itspercentage of a trust’sdividend, the lower theamount taxed beginning in2011.

There’s huge variationsbetween individual trusts,including the four in the

Utility Forecaster portfolios.As an income depositsecurity, Atlantic Power’sdividend should be exemptfrom the tax changes.Distributions for BoralexPower Income Fund havehistorically been 90 percentROC, meaning very littlewould be taxed at thecorporate level.

In contrast, PembinaPipeline owners get a smallbreak with dividends at 25percent ROC, while ARCEnergy gets little at 2percent. Of other “HowThey Rate” trusts, BellNordiq’s was 11.7 percentROC in 2005. Calpine PowerIncome’s was 70 percent,Great Lakes Hydro’s 54percent, Enerplus’ 5percent, Penn West’s 0percent and ProvidentEnergy’s 23.5 percent. BellAliant converted this yearand hasn’t published ROCinformation, but as a rural

telecom it should mirrorBell Nordiq.

All of these trustsrepresent solid businesses,capable of dishing out solidreturns as trusts and ascorporations beginning in2011. That makes themworthwhile holdings, evenif you bought in at higherlevels.Roger Conrad’s UtilityForecaster (US$129, 12issues), PO Box 4123,McLean, VA 22103 (800)832-2330 (12/06)

iShares S&P 500 ValueIndex Fund (IVE)

This exchange-tradedfund invests in the value-oriented holdings of theStandard and Poor’s 500Index. Its returns areshown in the table below.

If large-cap companiesbegin to outperform small-cap companies, as somethink will happen after


http://www.stingyinvestor.com

http://www.msn.com


IVE RETURNS2001 2002 2003 2004 2005 2006

-11.5% -21.0% 31.4% 15.6% 5.6% 9.1%

seven years of small-capoutperformance, this fundshould do well. It invests incompanies which areselected by a multi-factorinvestment model to be themost value oriented of theS&P 500 companies. Thefund’s major sector hold-ings are in financialservices (21.7%), healthcare (12.9%), industrialmaterials (11.9%) andenergy (9.8%). Its largestinvestments are Citigroup,General Electric, Bank ofAmerica, J.P. Morgan Chaseand Exxon Mobil. The fundhas a very low expenseratio of just 0.18%, whichcompares favorably withthe expense ratio of mosttraditional index mutualfunds. The fund would makea good core holding for theconservative investor.

Because this is anexchange-traded fund, ithas no minimum invest-ment. You buy it through abroker and pay a brokeragefee. Therefore, it is wise tobuy it through a low costdiscount broker or Internetbroker.No-Load Portfolios(US$99, 12 issues), 8635W. Sahara, Suite 420, TheLakes, NV 89117 (10/06).

Shoppers Drug Mart:Over the Border Rx

Richard Croft writes:“Canadian retail drug storechain, Shoppers Drug MartCorporation (SC, $49.53,Toronto), has attributes ofa solid investment. Itposted 3Q earnings of$0.57 per share, a 14.8%increase year-over-year, asfront-store, same-store

sales rose5.2% andpharmacysame-storesales

expanded 8.2%. AndShoppers is poised for evenmore organic growth overthe next few years. Thecompany has shownsurprising strength in theface of government-regulated price changes togeneric drugs in Ontarioand the advent of the firstof Wal-Mart’s newSupercenters. The re-pricing of generic drugs inOntario should have littleeffect on earnings goingforward, as volumes areexpected to increasesubstantially. The Wal-Marteffect won’t hit Shoppersas much as other largeretailers, because Wal-Mart’s drug/health-and-beauty segment is notexpected to expandsignificantly in the newSupercenters, leavingShoppers in about the samecompetitive position asbefore. The company hasplenty of room to grow inunderserved markets inWestern Canada and Quebecand it continues itsdiversification strategy byacquisition of such compa-nies as MediSystemPharmacy and MediSupply,specialty clinical andmedical supply operations.We’re looking for a targetprice of $52 within a year.Buy.”Dick Davis Digest(US$180, 24 issues), POBox 26774, Tamarac,Florida 33320 (800)654-1514 (12/06)

Earning double at TPXTempur-Pedic ($20.37;

New York symbol TPX; SIRating: Speculative; 800-

878-8889;www.tempurpedic; Sharesoutstanding: 83 million;Market cap: $1.7 billion)continues to rise in pricesince reporting sharplyimproved results in thethree months endedSeptember 30, 2006.

Sales rose 16.9% to$240.9 million from $206.1million. Earning rose 66.2%to $28.9 million from $17.4million. Earnings per sharerose 100% in the latestquarter to $0.35 from$0.18, on fewer sharesoutstanding due to sharebuybacks.

Tempur-Pedic makes anddistributes Swedishmattresses and neck pillowsmade from its proprietaryTempur pressure-relievingmaterial.

Sales in the UnitedStates rose 24.2% in thelatest quarter, withinternational sales up3.6%.

Tempur-Pedic nowexpects to report earningstowards the high end of itsestimate for this year of$1.26 to $1.31. Despite theprice rise, the stock stilltrades at just 15.9 timesthe average of this year’sestimate.

Tempur-Pedic is still abuy.Stock Pickers Digest,($168, 12 issues), 977-6021 Yonge Street,Toronto, Ontario M2M3W2 (416) 756-0888(12/06).

MoneyTipsTransAlta Corp

TA is no longer offering a 5%discount on shares purchasedthrough its DRIP.

Dividend GrowthOn December 1st, Fortis

increased its dividend from16 cents to 19 cents aquarter - just three cents,but that’s up 18.8%. Iworked out our new yieldon cost by dividing FTS’new annual dividend of .76by our purchase price in1995, which because of thefour-for-one split last yearis now $6.16 (.76/6.16=12.3%). We originallybought 500 shares for$24.64 = $12,320. With the4:1 split, now we have2000 shares valued at$24.85=$49,700. Fortis nowsupplies $1,500 a year inincome. You must work outyour “yield on cost” (YOC)for any shares you haveheld for a few years thathave growing dividends.Among other things, doingthis will convince you first,not to worry about anyfuture market downturn. Adrop of a few dollars on astock selling for $24 with acost of $6 a share is nocause for alarm.

Secondly, the data willallow you to comparereturns. Our TransAlta, forexample, purchased atabout the same time as ourFortis has a YOC of only4.5% and a gain of only$1,300. TA had 2¢ dividendgrowth in the last decade. Ihave vowed never to buy astock with poor dividendgrowth again. All you reallyget is yield.Connolly Report, 607-185Ontario Street, Kingston,Ontario K7L 2Y7. Closedto new subscribers.


http://www.tempurpedic


Financial Skeptic

Board Elections – Who toVote For and Why

George Gutowski

A board of directors is supposedly hired by inves-tors to represent the interests of investors. Inves-tors should no longer routinely accept the rec-ommendations of management. Investors receive

annual reports and proxy forms to elect directors and voteon various issues. Yearend results are announced near theend of the year! Somewhere in the range of 90% of pub-licly traded companies have a yearend of Dec 31. This meansthe window for annual meetings and proxy solicitation isvery tight.

Many investors either find this process bewildering orthey just plant their collective heads in the sand and ignoreit. It does seem to go away. Most investors will have a senseof earnings, dividends, PE ratios and other forms of meas-urement.

What do you really know about the board members?What do you really know about the new members? Whyare certain board members on certain committees? Why isone fellow, in particular, the chairman?

I find director bios to be laughably abbreviated. Yes, much ofthe profile has a teflon coating to it as various PR spin teams havepolished it. We need to start asking board members some simpleand direct questions. The questions are not unlike interviewingfor a job. This season may be particularly challenging as we mayhave another national election at around the same time as theannual meeting season. Some people will find this distracting.

We should understand what this man or woman is going todo for us and more importantly what will they do with our money.Here are a few questions I believe should be applied to boardnominees.

1Why is this individual being nominated? Usually the propa-ganda points to a wealth of experience. Experience is fine, but

is it applicable to this company? When experience is being touted,we should have a sense of some war stories about this individual.When you work with someone you will know how s/he performsin certain situations and why.

2 Why is the person willing to take the position? Direc-tors’ liabilities and responsibilities are taking quantum

leaps. Understanding their motivation will be important.General comments about how I wish to serve and betterthe world will not cut it.

3 What are the person’s social network all about? Areboard members nominating each other to the same cir-

cle of boards? If so, they will loss focus. The network willsupport itself first and then worry about the shareholders.

4 How independent will the individual be? Can s/he standup to management? Is there another relationship that

may become a significant factor? What other boards dothey sit on? Where is their primary source of employment?

Other questions should come to mind when the inves-tor ponders the choices. Many investors may not want todo this. It is time consuming. Very little credible resourcematerial is readily available. My suggestion is to communi-cate directly with corporate management (usually the in-vestor relations department), as well as attempt to commu-nicate directly with the nominees. If we can develop a grass-roots ground swell of sober reflection, management will beforced to engage the investor on these issues.

The issue is critical. Investor losses have always been se-vere or disastrous when the board failed. You can analyzethe numbers all you want, but when the leadership is weakthey will find a way to lose your money.

This is a lot of work. But did you not work a lot for yourmoney?

I am interested in hearing stories from any readers whoattempted to do some work in this area. We may developsome insights into companies depending on how they con-duct themselves in these circumstances.

George Gutowski, MBA, Author of both “Financial SelfDefense for Investors” and the “Financial Skeptic” newsletter,34 Tiverton Avenue, Toronto, ON, M4M 2L9 (416) 461-3126, [email protected].



Financial Instruments

Portfolio Construction-Financial Services

Bruce Campbell

In a previous article I gave an overview of the energysector construction of a portfolio. This month, I willconcentrate on how to put together the financial serv-ices section. At the end of the quarter, November

2006, the TSX index had a financial services weight of ap-proximately 32%.

As mentioned previously, I was mentored in the busi-ness under a specific style that I am still comfortable withalmost 30 years later. We called it “top down with a bot-tom-up twist”. In other words, as an investor you develop acertain overall view about the macro-economics, interestrates, politics, etc. You also decide your own risk tolerance.Are you preserving capital or going only for growth or pos-sibly somewhere in between? That determines whether ornot you would prefer to be over or underweight certaingroups. This can also be applied to a particular sector ofthe market as well.

The Canadian financial services portion of the TSX con-tinues to be a primary driver of the Canadian Composite In-dex and has generally been the largest weight for 30 years.Occasionally, tech or energy passes it at a cyclical peak andthen they fall back. The Canadian banks, which are abouttwo-thirds of the financial services weight (18.5%), have anoligarchic domination that allows good, steady, long-termreturns. They are not as cyclical or interest sensitive as theyused to be. Many of the large banks in this country have re-treated to retail businesses and do not chase big international,corporate loans anymore. This is the main reason why wewould still advocate having a fairly high weighting in the Ca-nadian portion of an investor’s equity portfolio. Also, withthe demise in large part of income trusts, they are the largest,safest, dividend payers in Canada.

The insurance industry has grown from almost zero, afew years ago, to 9.0%. With the demutualization of thelarge Canadian firms, there is now a good selection of com-panies to choose from with different characteristics. Theydo not just provide customers with life insurance anymore;they are into mutual funds, health and disability insuranceand many have expanded internationally.

The key, though, is to spread your risk within the sectoritself. Not all positions are created equally. We would breakour weightings up into 5 different types: senior banks, majorlife insurance companies, P & C insurance companies,smaller growth banks and real estate companies.

In Canadian senior banks, our 4 favourites are TD Bank(TD), CIBC (CM), Royal Bank(RY) and the Bank of NovaScotia (BNS). They all provide an investor with slightlydifferent exposures: TD is now focused on the retail busi-ness only, TD Canada Trust for Canadian retail, TDBanknorth for U.S. retail and TD Ameritrade for U.S. dis-count brokerage. It has a safe, profitable and growing rev-enue stream.

The Bank of Commerce is also focusing on Canadianretail but also, with recent acquisitions, has a nice exposureto Caribbean banking. Their recent quarter showed howwell the retail focus is working.

The Royal Bank has its retail side here in Canada but isa little more focused corporately and has RBC Centura onthe U.S. retail side, which is small but now profitable.

The Bank of Nova Scotia is the most international bankwith holdings in Mexico, the Caribbean, Japan, southeastAsia and South America.

On the insurance side, investors should be looking forgrowth and diversity. Again you get differences: Manulife(MFC) is Canadian life and health focused but also ownsJohn Hancock in the U.S. and has a large and fast-growingbusiness in Asia. Great-West Lifeco (GWO) is big in lifeand health insurance in Canada, has a large health insur-ance focus in the U.S. and a small but growing Europeanoperation. Lastly, Sun Life Financial (SLF) is Canadian lifeinsurance focused as well, but owns a U.S. mutual fundbusiness, which may be sold, and has a small joint venturein India.

In P & C insurance, I would favour Kingsway Financial(KFS). They are primarily a U.S. high-risk auto insurancecompany but have a good long-term track record and areextremely profitable. The stock is statistically very cheap.

Junior financials are somewhat riskier and should be keptto an appropriately small percentage of the portfolio but if



used successfully can add some extra return to a portfolio. Ilook for experienced management teams, long track recordson their liability side and good balance sheets. CanadianWestern Bank (CWB) stands out as fulfilling all of the cri-teria mentioned above but the stock looks fully valued. Onweakness, this would be a good, long-term holding.

The real estate sector (which is now included in the fi-nancial sector and with trusts included are 3.1% of the in-dex) has a good choice in both limited companies andREITs. A mixture of both might make sense. It would behard to go wrong with Riocan or Boardwalk. Riocan(REI.un) is the largest REIT—a good shopping centre playas it is geographically diverse and very well managed.Boardwalk (BEI.un) is the largest apartment REIT with alarge western Canadian exposure, which is benefiting fromthe growth in Alberta.

Although an investor should do his or her own researchon the individual names, constructing a portfolio in thismanner (with the macro-overview) will never let you gettoo far deep into one area, even within the financials as a

whole. Not everyone will have the depth to own 8 or 9names but regardless of how many names you own, be cog-nizant of what they are. Lower your risk as much as youcan by the diversifying your choices.

One way to keep that from happening follows. When-ever you get more than 50% over the index weight, start totake profits. That has usually happened because that groupis outperforming. The same goes for the bottom side. Ifyou have a low exposure that has dropped below half of theindex weight that is usually a sign that longer term theywill show a recovery.

This system allows an investor to use the checks andbalances as a way to make sure that they are not too far outon a limb as far as weightings, both in the portfolio overalland, as in this case, within the financial services weight ofthe portfolio.

Bruce Campbell, MA, Portfolio Manager, Campbell & LeeInvestment Management Inc, 1075 North Service RoadWest, Suite 200, Oakville, ON, L6M 2G2 (905) 469-4630, [email protected]

name) to buy additional shares periodically at no costexcept for Manulife and Sun Life. See MoneySaver’sMessage Board for share exchange options: http://www.canadianmoneysaver.ca/rc_msg_topic.aspx.

* Dividends paid in U.S. dollars and receive dividend taxcredit. Non-Canadian company dividends are taxable likeinterest income.^ For National Bank you need to own 100 shares for theDRIP and 1 share for the SPP.Only Pulse Data and Agnico Eagle now offer 5% discountsoff the market price for their DRIPs. Bank of Montrealincreased its dividend 4.8% to $2.60. Bank of NovaScotia increased its dividend 7.7% to $1.68. CanadianGeneral Investment increased its dividend 21.0% to$1.50. Manulife increased its dividend 14.3% to $0.80.National Bank increased its dividend 8.0% to $2.16. Telusincreased its dividend 36.4% to $1.50.Calculation for interest equivalent of dividend yield:(100 - marginal rate for dividends) divided by (100 -marginal tax rate on regular income).For example, in 2006 an Ontario taxpayer with ordinaryincome of $61,512 uses: (100 - 9.01) divided by (100 -32.98) is approximately 1.3597.Therefore, a stock with a Canadian dividend yield of 5.0%has an equivalent interest return of 5.0 x 1.3597, whichis approximately 6.79%.You may calculate your own dividend-to-interest ratio with thetax rates supplied by Brian Quinlan in the Nov/Dec issue eachyear. These ratios will change once the new legislation isenacted—the dividend tax credit will be greater. See http://www.canadianmoneysaver.ca/rc_drips_spp.aspx for moreDRIP info.

CANADIAN DIVIDEND REINVESTMENT PLANS (DRIPs)WITH SHARE PURCHASE PLANS (SPPs)

TSX 52 WEEK CLOSING YIELDCOMPANIES - SYMBOL HIGH $ LOW $ PRICE $ DIV $ % P/E

Aberdeen Asia Pacific – FAP 9.05 7.46 8.95 0.72 8.0 39.4

Pulse Data Inc – PSD 3.39 2.10 2.53 0.15 5.9 22.5

Cdn Gen Investment – CGI 30.99 22.00 28.78 1.50 5.2 4.0

BCE Inc – BCE 34.25 25.32 29.73 1.32 4.4 14.7

Emera – EMA 22.98 17.69 22.87 0.89 3.9 19.2

Bk of Montreal - BMO 72.22 58.58 68.97 2.60 3.8 13.1

TransAlta Corporation – TA 26.91 21.88 26.20 1.00 3.8 19.9

National Bank ^ - NA 66.49 55.89 65.88 2.16 3.3 12.6

Bk of Nova Scotia - BNS 53.39 41.55 52.04 1.68 3.2 14.5

TransCanada Corp – TRP 40.34 30.77 39.99 1.28 3.2 16.8

Cdn Imperial Bk (CIBC) - CM 97.23 73.25 97.23 2.80 2.9 13.0

Enbridge - ENB 41.45 31.75 40.75 1.15 2.8 22.3

TELUS - T.A 65.35 42.05 54.94 1.50 2.7 23.0

Fortis – FTS 28.85 20.36 28.74 0.76 2.6 21.9

Sun Life Financial – SLF 51.75 41.79 50.08 1.20 2.4 14.3

Manulife – MFC 39.45 33.74 39.03 0.80 2.0 16.2

Alcan* - AL 64.99 41.78 56.66 0.92 1.6 19.2

Imperial Oil - IMO 45.20 34.31 44.54 0.32 0.7 13.5

IPSCO – IPS 126.99 90.00 117.32 0.80 0.7 7.2

MDS Health - MDS 23.20 18.56 20.00 0.13 0.7 66.7

Suncor Energy – SU 102.18 71.07 92.24 0.32 0.3 12.5

Agnico Eagle Mines* - AEM 52.03 20.00 49.00 0.04 0.1 36.5

CHART NOTES - Closing prices on December 13, 2006 - Stock prices change daily.Check for current prices. These Canadian companies listed on the TSX are the onlycompanies with both a DRIP and SPP. With the DRIP, you can reinvest all yourdividends to purchase additional shares at no cost except for Manulife and Sun Life.The SPP allows shareholders (shares registered in your own name, not a brokerage’s

http://www.canadianmoneysaver.ca/rc_msg_topic.aspx.

http://www.canadianmoneysaver.ca/rc_drips_spp.aspx

http://www.canadianmoneysaver.ca/rc_msg_topic.aspx

http://www.canadianmoneysaver.ca/rc_drips_spp.aspx



Beating The TSX

Why I’m Sticking WithIncome Trusts

David Stanley

I bought my first income trust in 1993 and it is onethat I own today in my RRSP. Currently, a signifi-cant portion of my RRSP is invested in income trustsand the other half in short-term bonds, a result of

the flattening yield curve. The recent decision by the fed-eral government to introduce a tax scheme aimed at in-come trusts will be painful, no doubt, but it hasn’t con-vinced me to sell them. Here’s why—the initial purpose ofincome trusts for my RRSP was to produce high yields withsome capital gains, but as I approach RRIF time that haschanged. I now want my income trusts to generate enoughcash to help defray the mandatory yearly withdrawals sothat I don’t have to sell any equities and incur trading costs,and I want my RRIF to last as long as possible since it maybe passed on to a surviving spouse.

Let’s see how that might play out by looking at a hypo-thetical case. Consider a situation where someone who holdsan RRSP worth $250K and must convert it in 2010, oneyear before the onset of income trust taxation. The RRSPcontains half short-term bonds yielding 4% and half in-come trusts yielding 8%. We will assume a tax rate on in-come trusts of 31 percent, although I gather we don’t knowthe exact final number yet, and we will further assume thatdistributions will be cut by an amount equal to the tax rateand that capital gains are negligible. Federally mandatedwithdrawal rates for the first 5 years of a RRIF are:

AGE %69 4.7670 5.0071 7.3872 7.4873 7.59

So, in the first year our RRIF holder must withdraw11.9K and pay tax on that amount as if it were income. In2010 the portfolio would generate 15.0K [(125K X 0.040)+ (125K X 0.080)] but in 2011 only 11.9K [(125K X 0.040)+ (125K X 0.055)]. In both cases enough cash would begenerated to offset a mandatory first-year withdrawal. How-ever, in a few years, no matter if the blended yield is 6%,

5%, or 4%, not enough cash will be generated within theportfolio to satisfy the ever-increasing withdrawal rates.Thus, by age 71 when 7.38% will need to be taken out,obviously a rate of return of 7.38% is needed to keep pace.Without capital gains it is apparent that selling will beneeded to meet the withdrawal requirement. Once thisbegins, the downward spiral accelerates yearly.

Thus, we need the highest possible returns in the RRIFto forestall the exhaustion date. To determine exactly howimportant return rates are, one can visit taxtips.ca (http://www.taxtips.ca/calculators.htm#) and perform some calcu-lations. We will look at three scenarios; in the first, the 20-year performance of a 250K RRIF where only the mini-mum withdrawals are made is graphed for three differentyields (Figure 1).

FIGURE 1. HOW THE RATE OF RETURN DETERMINES THE VALUE OF ARRIF.

This shows the significance of rate of return on the RRIFvalue. After 20 years the portfolio being replenished at 6%was worth about 50% more than one earning only 4%.Another way to look at this is calculate the duration of theRRIF using a fixed annual withdrawal. In this case we willtake out 24K/yr and assume a 2.5% inflation rate, againlooking at the rate of return (Figure 2).

http://www.taxtips.ca/calculators.htm#

http://www.taxtips.ca/calculators.htm#



Given the current understanding of what will happen toincome trusts, investors may be tempted to jettison themfrom their portfolio. As always, we need to think aboutwhat we would replace income trusts with. Bonds? If theyield curve stays as flat as it is now, it would seem that a 4%yield might be as high as can be expected, no matter whatthe duration. If we exclude the riskier small-cap stocks andconcentrate on the blue-chip large-caps that pay signifi-cant dividends, we are looking at companies similar to thosein our “Beating The TSX” portfolio. Over almost a 20-year span the yearly total return of the 10-stock portfoliohas averaged a little over 13%, but not without some vola-tility.

Results have varied from +55% to -14%. This type ofvariation can really hurt a RRIF account in the event of astring of bad luck at the beginning of the withdrawal pe-riod since no further contributions can be made.

Where does that leave us? With bonds that return verylittle above true inflation, with income trusts whose distri-butions are going to be taxed before they reach us, andwith stocks, where even the traditionally safest and bestperforming can go through troughs of underachievement.For me, I think diversification can be a useful tool in situ-ations such as this. Some bonds for safety, some incometrusts for higher distributions, and some good quality stockswith the hope of capital gains. The exact proportion of eachclass would have to be decided upon by the investor’s toler-ance for risk and the importance of the RRIF in the totalretirement budget. Even given the proposed legislation onincome trusts, I think income trusts can play an importantpart in a diversified RRSP/RRIF.

As always, I hope this column will generate discussionand I will attempt to answer your questions.

Note: I wrote the above quite soon after the Minister’sOctober announcement. At that time we were given to be-lieve that the details would be available soon. It now ap-pears that they won’t be released until sometime in the new

A Simple Theoretical Example

Consider three starting RRIF values, $250K,$240K, and $230K. We can calculate the duration ofthe RRIF using a fixed annual withdrawal of $24Kand rates of return of 4, 5, and 6%. Check thegraph.

The individual beginning with $250K but achiev-ing only a 4% rate of return will run out at age 81,but this is the same age as the individual whobegan with only $230K and achieved a 6% return.

Does this mean that the initial RRIF value isunimportant? Of course not, but, on the other hand,dropping a little (involuntarily) because your

income trusts have lost some of their value does notpresent an insurmountable problem as long as theirdistribution is not cut, when compared to someone whosold income trusts and switched to lower yielding bonds.

FIGURE 2. HOW THE RATE OF RETURNS DETERMINES THE LIFE OF ARRIF.

The rate of return has a major influence on the usefullife of the RRIF. Also, a corollary is that the more you startwith the longer a RRIF will last— making maximum yearlycontributions manditory. Finally, we will examine the ef-fect of rate of return on the maximum withdrawal that canbe taken out of the RRIF over a 20-year period starting atage 69 (Table 1).

TABLE 1 - HOW THE RATE OF RETURN DETERMINES THE MAXIMUMWITHDRAWAL FROM A RRIF FOR A 20-YEAR TERM.

Rate of return Yearly Maximum(%) Withdrawal

6 $21,7965 $20,0614 $18,395

So, a 1% increase the rate of return equates to nearly a9% increase in the maximum allowable drawdown, a notinsignificant amount over the course of one’s retirement.By now I think it has been demonstrated quite clearly thatthe rate of return earned in a RRIF is of prime importance.The question becomes how does one maximize that rate.



year, perhaps not long before the bill is tabled and shortlybefore a budget vote is taken. This will surely curtail anytime for consultation about the proposed legislation andrestrict an individual investor’s ability to react before thebill is voted up or down. These conditions can often leadto panicked reactions and I would suggest a calm evalua-tion of all the details before taking any action.

David Stanley, PhD, PO Box 12, Rockwood, ON, N0B2K0 (519) 856-9820, [email protected]

Investor Protection

Portfolio Turnover

Ken Kivenko

A fund’s turnover rate basically aims to rep-resent the percentage of the fund’s hold-ings that change every year. It’s importantas an indicator of management style, fund cost

structure and tax exposure. An inherent disadvantage ofmost actively managed funds is that they don’t want to showa lot of low-yielding cash or have the fund exposed to in-come taxes so a certain amount of transactional activity/distributions is always present. Virtually all mutual fundscontain unrealized capital gains that could result in unex-pected and untimely stock sales and capital gains distribu-tions. Fund prospectuses rarely alert investors to the taxissues related to the fund’s investment strategy.

John Bogle, author of Bogle on Mutual Funds observed“In no other section of the financial services field are costand value more closely linked.” Bogle scrutinized the “in-visible cost” of executing portfolio transactions. Even thoughgiant funds pay lower commissions than do individual in-vestors, brokerage costs can account for 0.5% to 2% peryear of fund assets. Furthermore, he noted that smaller fundswith high rates of turnover have even higher costs and thatequity funds have portfolio turnovers almost double thatof pension funds. When mutual funds had low turnoversof about 16 % (in the fifties and mid-sixties) they werestockowners, at 110% they are stock traders. He notes thatat 16 % turnover, a $1 billion mutual fund sells and buys a

total of $320 million worth of stock a year. But at 110%portfolio turnover, the fund sells and buys a total of $2.2billion of stocks annually.

DefinitionPortfolio turnover is formally defined by regulators as

the lesser of purchases or sales of the portfolio securities fora financial year divided by the average value of portfoliosecurities during the year and multiplying by a 100% toconvert to a percentage. Excluded from both the numera-tor and denominator are amounts relating to all securitieshaving a remaining term to maturity on the date of acqui-sition by the mutual fund of one year or less. If a fund hasa 100% turnover rate that means the fund manager, intheory, has sold every single stock position once. In prac-tice, however the manager might have held 50% of all po-sitions for the past 5 years and turned the other 50% twicethroughout the year.

ExampleAssume the $100 M fund is performing poorly and there

are net redemptions throughout the year, resulting in stocksales to provide cash to unitholders. If securities sales = $41M and purchases = $28 M, then the portfolio turnover is28/100 x 100%=28%.

MoneyTipsPayout Ratios

The formula to calculate thepayout ratio for a stock follows:

P.R. = Dividend of the StockEarnings of the Stock

If the P.R. of a stock is 75%, then 75% of the currentearnings are paid to the shareholders in the form of thedividend.



In this situation, the statistic dramatically underestimatesthe level of trading. Unless securities sales and purchasesare approximately equal, this statistic, as defined, will al-ways provide a low estimate of transactional activity. Be-cause the turnover formula sometimes uses sales and some-times uses purchases, you can’t depend on it to provide aconsistent indication for assessing tax impact. MorningstarCanada’s website provides pre and after-tax returns for mostmutual funds.

Impact of High TurnoverOne big consequence is that you might have to pay sub-

stantial taxes on any capital gains adversely impacting yourcurrent after-tax returns and cash flow. AND capital gainsdollars on your T5 slip reduce the amount of money avail-able for long-term compound growth. High turnover of-ten means lots of distributions if managers spin out theirtrading profits to unitholders (otherwise the fund itself mustpay taxes). Not all turnover of stocks inside a mutual fundtrigger realized capital gains, e.g. high turnover of stocksthat have declined in value. Turnover can be reduced if netnew money is injected into a fund but increased if there arenet redemptions. You could have tax exposure even if afund posted a negative return as happened to many inves-tors at the end of 2000.Canadian equity fund managersturn their portfolios over between 30 to 150% a year andoften much more. Request the 5-year turnover history foryour funds.

Total trading expenses, which include brokerage com-missions and the market impact of buying and selling mas-sive amounts of shares, are not an insignificant cost. Un-duly high turnover adds to fund expenses and reduces re-turns. The Trading Expense Ratio(TER) that regulators nowrequire fund companies to disclose provides an indicationof the impact on pre-tax returns due solely to quantifiablebrokerage commissions (since bonds have embedded com-missions, the TER is misleading for bond and balancedfunds).

Moving substantial blocks of securities around, especiallyon the relatively small TSX, tends to move market prices.The funds will be able to liquidate a large position only ata discount from prevailing prices and to purchase a largeposition only at a premium. Additionally, a time delay inliquidating a large position can give rise to an opportunityloss if the price migrates downward during the interval.Because other funds in the fund family are likely to take onsimilar stock positions, the effects could be larger than wouldbe the case if the funds were independent.

Some IssuesTurnover can be higher than expected due to a mutual

fund selling off securities to trigger capital gains (exit anovervalued stock) or use tax loss carryovers from prior years.

A fund may also have to sell part of its holdings to meetunitholder redemption requirements. With the growth ofthe Canadian fund industry and reinvested distributions,funds must buy additional stock to actively manage thefund or track an index.

The portfolio turnover ratio for income funds, bondfunds and balanced funds may tend to be higher than forother funds because their portfolios usually have a higherpercentage of bonds and other fixed-income investmentswhich mature or are called during the year. This meansthat these funds must continually replace some of their in-vestments. Index funds may have lower portfolio turnoverand therefore lower transaction expenses especially if theirindex is limited, e.g. DJIA consisting of 30 stocks but aS&P 500 index fund may have a higher turnover metricthan a buy-and-hold fund.

Another point. Mutual fund managers turnover as well.When a new manager arrives, it’s more than just a newname on the annual report. A new manager can dramati-cally alter the portfolio, sometimes within weeks, and turnit into a very different fund than what an investor initiallybought, as well as incurring significant trading expenses.

A 1997 Morningstar study of domestic U.S. stock fundson the adverse impact of portfolio turnover concluded that“in general, the lower a fund’s turnover, the higher its re-turns. This relationship is statistically significant, and it holdsup for all of the time periods measured… Turnover hasclearly done the most damage to large-cap value and blendfunds, overall. The clearest pattern is that the benefits ofturnover decrease as risk levels decrease—turnover has beenmore rewarding in the high-risk segments of the style box.This relationship makes sense. The more volatile the stock,the better the chance that smart trading can bring in sub-stantial gains, or avoid crippling losses. Indeed, in a fast-moving market, a suddenly unpopular stock can lose 50%or more of its value in a matter of days (or hours)…”

ConclusionIf funds are held outside a registered plan, examine what

your after-tax return has been. That’s the return that counts.Tax-efficient funds attempt to minimize short-term capitalgains with low turnover ratios and by offsetting gains withlosses as they weed and feed their portfolios. Rather thanrelying on the most recent year of turnover data, take anaverage over 3-5 years to see the trend. The MER, however,appears to be the single most important indicator of long-term, pre-tax mutual fund returns.

Despite its imperfections, the portfolio turnover statis-tic, when combined with other indicators and data such ashistorical capital gains distributions and trading commis-sion expenses, can provide useful information particularlyas regards style/trading practices, costs of fund ownership,income tax exposure and tax-efficiency relative to other



MoneyTipsInterest Returns

Often we look to term deposits,GICs and the like for our interestincome. You may gain greaterreturns depending on such factors

as the investment amount and term with treasury bills,commercial paper, and bankers acceptances. Always shoparound for the best rate. (TD Waterhouse lowered theirminimum to $100,000 for you to qualify for theirPremium Money Market Fund.)

funds in the same category. If you do find a high turnover,high performance mutual fund you want to buy, considerputting it in a tax-deferred account. In any event, use turno-ver as a tie-breaker. If you find 2 funds in the same cat-egory that are equally attractive, lean towards the one withthe lower portfolio turnover ratio.

Ken Kivenko, PEng, President , Kenmar, 2010 IslingtonAvenue, Suite 2602, Etobicoke, ON, M9P 3S8 (416) 244-5803, [email protected]

Gentlemen Prefer Shares

Interest-BearingPreferreds

James Hymas

What?” my interlocutor gasped, “you meanthere are preferred shares that pay divi-dends?”

I assured him that dividend-paying pre-ferred shares were not only extant, but normal. He hadbeen asking about his holding of BAM.PR.T and whatshould be done about it. An advisor had recommended itto him for his RRSP several years earlier and he had duti-fully bought it without much further investigation.

BAM.PR.T is an example of a preferred security, whichmay be defined as an interest-bearing investment trading with-out accrued interest on a stock exchange, with at least someattached covenants ranking it ahead of the common stock.Many of these were issued in Canada under the Merrill Lynchtrademark, “Canadian Originated Preferred Security”(COPrS), and enjoyed a vogue for a few years since. Providedthe terms of issuance were sufficiently favourable, the issuercould treat the financing as equity rather than debt for bal-ance sheet purposes. Such qualifying terms included a verylong term to maturity and the ability of the corporation tosuspend interest payments without triggering a default. Inother words, the holder of the issue might be very angry thathe was not receiving payments and be able to ensure the suf-fering was shared by the common shareholders, but couldnot petition the corporation into bankruptcy.

“ These games are over now. As Shaw Communicationsnoted in their press release (http://biz.yahoo.com/iw/060630/0140872.html):

“Effective September 1, 2005 the Company retroactivelyadopted the amended Canadian Standard, Financial Instru-ments - Disclosure and Presentation, which classifies the Com-pany’s Canadian Originated Preferred Securities (“COPrS”)and the Zero Coupon Loan as debt instead of equity.”

A few such issues are still trading, but most of the inter-est-bearing preferreds now trading have been issued by splitshare corporations with investment portfolios concentratedin the income trust sector of the market. As was noted inthe November issue of Canadian MoneySaver, split sharecorporations will, in essence, split the total return on a port-folio into income and capital gains, with the income beingearmarked for the preferred shareholders and the capitalgains for the capital unit holders. Some of the splits areprecise, some are woefully out of balance—but that’s theidea, anyway.

Income trusts, as shell-shocked veterans of the Hallowe’enmassacre will remember, pay interest income, not dividends,and thus trusts specializing in this market will have only in-terest income to distribute to their preferred shareholders. Wedon’t know how long this particular investment model willlast, but for as long as it does we must understand the instru-ments designated as “Preferred” by both the Toronto Stock

Chart 1

http://biz.yahoo.com/iw/060630/0140872.html



Exchange (who signal their agreement with the designationby listing the issue with a “.PR.” insertion into the ticker sym-bol) and DBRS (who will assign a credit rating on the Pre-ferred Shares, Pfd- scale)—even if the only purpose of under-standing them is to avoid them.

My firm’s analytical software, HIMIPref™, tracks anumber of interest-bearing preferred issues (usually distin-guished from the dividend-paying preferred shares by refer-ring to them as preferred securities). Interest-bearing issuesare, sadly, often too illiquid or too short term for purchase,but some investors with particular requirements may oftenbe rewarded for poking around in the Toronto Stock Ex-change’s bargain bins.

Chart 1 below shows a graph of Yield-to-Worst vs. Modi-fied Duration for the interest-bearing issues tracked (see July2006 Canadian MoneySaver for an explanation of “Yield-to-Worst”) and makes it readily apparent that there are someattractive yields on offer—6% interest income for investment-grade paper might strike some as being an attractive rate, es-pecially now at the height of RRSP season!

After checking the DBRS credit ratings (obtainable fromwww.dbrs.com), as explained in the October issue, and ex-amining financial statements obtained from SEDAR atwww.sedar.com, we can prepare a summary such as Table1. This table reviews the credit characteristics of the issuesplotted in Chart 1 and is similar to our review of split sharesin the November/December 2006 MoneySaver. We shouldnote that:• TA.PR.C has a credit rating of only Pfd-3. As a general

rule, I do not recommend investing in preferreds (eitherdividend or interest paying) of this quality. These arethe preferred shares’ equivalent of “junk”. While theymight be attractive, they’re not only more exposed tounforeseen events but, as a related effect, are less wellbehaved with respect to interest rates in general than arethe better quality issues. As fixed-income specialists, let’sstick with what we know best!

• The annual reports are all fairly dated. More infor-mation can be obtained from company filings onSEDAR, from the company websites and from the dailynewspaper. BSD.PR.A, for instance, is backed by a port-folio of income trusts. Unless we have more precise in-formation, it is prudent to knock 25% off the “assetcoverage ratio” to reflect the Hallowe’en massacre. Thisratio is better thought of as being 1.78:1, not 2.38:1.

• DBRS lists many of the issues as being under re-view. Find out why the issues are being reviewed fromtheir website and determine for yourself whether youare comfortable with the idea of investing in the com-panies. Note that sometimes a review can be favour-able!

• DBRS does not list some of the issues as being underreview, although their investment characteristics are simi-lar to those being reviewed. Why is that? Frankly, I don’tknow, and will review all the ratings with a jaundicedeye given the impairment of asset values since the lastfinancial statement.

• I have not shown the calculations relating to the operat-ing companies. Credit analysis of operating companiesis much more complex than that required for split sharecorporations. Additionally, I consider the rating agencypronouncements regarding operating companies to bemore reliable than for split shares.

Table 1 shows no hideous surprises, so we can turn to a

9.6 9.725 9.85 9.975 10.1 10.225 10.35 10.475 10.60.0875

0.075

0.625

0.05

0.0375

0.025

0.0125

0

0.0125

-0.0125

-0.025

-0.0375

-0.05

CHART 2 - FCN.PR.A - PRICE/YIELD-TO-WORST SENSITIVITY

X-Axis - BidY-Axis - Yield-to-Worst (at Bid)

Historical Market Data Source: TSE (c) 1993-2006 The Toronto StockExchange. All Rights Reserved.



more detailed examination of Chart 1. BAM.PR.S is plot-ted as having the highest Modified-Duration-To-Worst ofthe sample, despite the fact that we know it has been calledfor redemption (the announcement was made November16, according to the company website at http://www.brookfield.com/InvestorCentre/835.html). This illus-trates one of the perils of relying mechanically on Yield-to-Worst (and hence, on the Yield-to-Worst scenario) as anindicator of investment expectations—it can vary consid-erably when an issue is trading close to its call price.

To determine the Yield-to-Worst for BAM.PR.S, theHIMIPref™software I used in the preparation of this arti-cle selected three scenarios from a plethora of possibilitiesas being sufficiently likely to be worthy of further exami-nation. These scenarios are specified in Table 2 and, it shouldbe remembered, are prepared without specifying that weknow the issue will be called for redemption effective Janu-ary 2, 2007. We note that the calculated yields seem veryhigh, as the yield of the instrument is “only” 8.35% … butit must be borne in mind that this issue was quoted with abid of $25.32, despite the fact that a dividend of slightlyover $0.52 was to be earned, in its entirety, on the next ex-dividend date of 2006-12-13. Since an entire three-months’worth of interest will be earned in its entirety less than twoweeks from the date of the calculation, yield calculationscan return surprising results when performed for short hold-ing periods.

A Yield-to-Worst calculation utilizes only the price,maturity date, and cash flows of the issue examined. It doesnot automatically include common sense, such as the knowl-edge that Brookfield can borrow money much more cheaplythan 8.35% (and may therefore be expected to call at thefirst possible instant) and the ability to check the companywebsite, DBRS and news reports. Like any other calcula-tion, it is an aid to understanding, not a substitute.

Market risk is often exacerbated by the potential for anearly call—see the references to redemption in the June2006, MoneySaver. Many issues have a call price of par, ex-ercisable by the company once per year, every year. Suchschedules are not in the best interest of the preferred share-holders. It means the price of the issue can never rise toohigh, since it is anchored by the possibility of such a call inthe near term—the yield will drop very quickly as the pricerises. While we are not necessarily looking for capital gainswhen we purchase preferred issues, we won’t necessarily turnthem down, either! And a premium to our purchase pricewill, if the issue is called, help compensate for the time andtrouble we have to take in order to find a new investment,as well as making it somewhat less likely that the capitalunit holders will retract their holdings in the first place.

For a graphic depiction of how quickly yield can go nega-tive when the price rises, see Chart 2, in which yield isplotted against price for FCN.PR.A, one of the issues ex-amined in this article. It is clearly the height of lunacy topay more than about $10.20 for this issue (including com-mission!), but the TSX reports a 52-week high of $10.70.Note that FCN.PR.A may shortly be merged by the man-ager into a larger trust—see my blog at http://

TABLE 1 - CREDIT CHARACTERISTICS OF SOME PREFERRED SECURITIESNet Normal

Date of Income,Annual Preferred Asset before Preferred Income DBRS

Type of Report Common Share Coverage Preferred Share Coverage CreditTicker Company Examined Equity^ Capital^ Ratio Dividends^ Dividents^ Ratio Rating

BAM.PR.S* Operating — — — — — — — Pfd-2(low)

BAM.PR.T Operating — — — — — — — Pfd-2(low)

BSD.PR.A Split 2005-12-31 94,364 68,423 2.38:1 7,057 3,665 1.92:1 Pfd-2

ENB.PR.D Operating — — — — — — — Pfd-2

FCF.PR.A** Split 2005-12-31 56,500 47,538 2.19:1 6,478 3,385 1.91:1 Pfd-2 (Under Review)

FCI.PR.A** Split 2005-12-31 39,231 18,665 3.1:1 4,244 5,722 0.74:1 Pfd-2 (Under Review)

FCN.PR.A** Split 2005-12-31 169,297 123,000 2.4:1 14,468 7,688 1.88:1 Pfd-2 (Under Review)

MST.PR.A Split 2005-12-31 70,400 53,166 2.3:1 5,927 4,446 1.33:1 Pfd-2(low)

STW.PR.A Split 2005-12-31 113,629 72,363 2.6:1 15,195 5,092 2.98:1 Pfd-2(low) (Under Review)

TA.PR.C* Operating — — — — — — — Pfd-3

^ Thousands. *By the time of publication, both BAM.PR.S and TA.PR.C will have been called. They have been included in this review of thesituation as of November 30 for completeness. ** There is an outstanding proposal to merge FCF.PR.A, FCI.PR.A and FCN.PR.A.

TABLE 2 - BAM.PR.S : SCENARIOS EXAMINED FOR YIELD-TO-WORST ANALYSIS

Maturity Date Maturity Price Yield to Maturity2007-1-30 $25.00 9.05%2007-6-29 $25.00 8.62%2036-11-30 $25.14* 8.45%

*This is a “limit maturity” - a 30-year term used for analyticalpurposes by HIMIPref™. In such a case, the maturity price reflectsthe current price, with a separate computation of the final incomepayment.

http://www.brookfield.com/investorcenter/index.asp

http://www.prefblog.com/?p=377



Am I Going to Be Okay?

Achieving FinancialComfort in Today’s World

Francis D’Andrade

One of the most widely accepted theories ofhuman motivation was advanced by psycholo-gist Abraham Maslow. He presented his hier-archy of needs, not as a finished work, but as

an untested theory that he hoped others would take up anddevelop further.

Maslow believed that humans are motivated by needs,but he also believed that some needs are more urgent thanothers. In Maslow’s hierarchy of needs, we take care of ourbasic needs first and leave the rest for later.

Our physiological needs come first: food, water and ahat to keep us warm. For a hungry man, the choice be-tween a sandwich and a BMW is a no brainer in Maslow’sworld. Our safety comes next. We need enough to feel freefrom harm. The BMW is still a little way off.

Third, we need love and companionship. Friendships,marriage, family, and community play a big role in ouremotional health and protect us from loneliness and isola-tion. If all else fails, get a dog. But still no BMW.

Maslow referred to these first three basic needs as defi-ciency needs. You do not necessarily get a big emotionallift from them but if you are deficient you have to go backand fill the vessel before resuming your climb up the hier-archy of needs.

We spend much of our time attending to our needs atthese three levels. Food, clothing, shelter, friends, a spouse

and a dog. What more can a body want? Esteem, that’swhat. Esteem involves our ego and the satisfaction we de-rive from power, prestige, or achievement. Maslow distin-guished two levels of esteem; the respect and adoration ofothers and the higher need of self-respect. A feeling of self-worth is more important than the recognition of others,but it’s much harder to attain. Do you lease that BMW toimpress your friends or buy it because you love good cars?

At the fifth and final level comes self-actualization. Weneed to feel a sense of personal development and expressour creativity. According to Maslow, only a few peopleamong us, perhaps as few as two per cent, have the capac-ity to achieve self-actualization. With respect to a great theo-retician, I think self-actualization means feeling comfort-able in our own skin, and I think each and every one of uscan feel that way.

Maslow’s hierarchy of needs can also apply to the worldof personal finance. We all have basic financial needs uponwhich we build a foundation for our higher needs, whichdeliver an increasing sense of security and independence.

At the first level, we need an income. With an income,we can meet our basic needs and achieve financial inde-pendence.

At the second level, we need savings. Our savings notonly keep us in the game during difficult times, they alsoprovide us with a sense of comfort. Savings represent both

www.prefblog.com/?p=377 for details. Issues discussed inthis article with a call premium that declines over time,which is the ideal we should look for when examining anyissue, are BSD.PR.A, MST.PR.A and STW.PR.A. The firstmentioned of that triumvirate recently had an annual re-traction. No preferreds were called because the companywas able to purchase enough in the marketplace at priceswell below the call price, which is exactly the way it shouldbe. Interested readers may read my blog, at http://www.prefblog.com/?p=372 for more details and commen-tary.

So there you have it! Preferred securities pay interest and

can be a rewarding addition to your list of potential invest-ments, particularly for RRSPs. But you must:• check the credit quality;• check the Yield-to-Worst;• check the potential for an early call; and• don’t pay too much!

James Hymas, CFA, Hymas Investment Management, 129Humbercrest Blvd, Toronto, ON, M6S 4L4 (416) 604-4204, [email protected]. James specializes in preferredshare analysis.





MoneyBookMoney in the Bank – Saving More of Your

Hard-Earned Dollars by Tariq Sean Malik, MoneyPublishing; $19.95, ISBN: 0-9736506-1-3.

MoneyTipsIncreasing Dividends

Carlyle Dunbar penned an eye-opening piece in the Decemberedition of Investment Executive. Ipresent a portion of the table

carried in that item (source: TSX Review).

DIVIDEND WINNERSBig increases this year: % increase in 2006*Corus Entertainment B 760

Teck-Cominco B 150

Shaw Communications B 144

Rogers Communications B 113

Shawcor Ltd. A svs 100

Husky Energy 100

Xceed Mortgage Corp. 100

Home Capital Group 80

BMTC Group A 71

Stella-Jones 60

Russel Metals 60

ING Canada 54

Easyhome Ltd. 50

Ensign Energy 50

Homburg Investment A & B 50

Pulse Data 50

Frequent increases inpast seven years Number of increases**Great-West Lifeco 14

IGM Financial 14

Royal Bank of Canada 13

Power Financial 12

Bank of Nova Scotia 12

Bank of Montreal 11

National Bank 10

Shaw Communications B 9

AGF Management 8

Canadian Utilities A & B 8

Reitman’s Canada 8

Russel Metals 8

Sun Life Financial 8

Toromont Industries 8

*To the end of October**Including increase in 2006

Example: Corus raised its dividend 760%, in 2 steps. Great-WestLifeco raised its payments 14 times since 2000.

our job security fund and our future fund.Our financial independence depends on fulfilling our

needs at the first two levels. We may not die without them,but we’ll certainly diminish our chances of achieving maxi-mum happiness and fulfillment.

Next are our higher financial needs which we requirefor fulfillment and growth. At the third level comes homeownership. A house is the most significant non-financialasset that most of us will ever own. Not only does it satisfyour need for shelter and provide a great place to raise afamily, it also provides us with safety, forces us to save, en-hances our credit, appreciates tax-free, and protects usagainst inflation. None of this comes, by the way, frommerely buying a house. The trick is to own it.

At the fourth level comes retirement. At this stage in lifemost of us stop working and no longer earn an income.Instead we rely on some form of long-term savings, whichwe can use to create a stream of income that will sustain usfor the rest of our lives. Without these savings, we have toeither keep working or live quite modestly.

We reach the fifth level, equivalent to Maslow’s self-ac-tualization, when we achieve financial independence andself-reliance. As I’ve mentioned, everyone has a differentsense of autonomy and self-reliance and the financial re-quirements to achieve them. As in Maslow’s hierarchy, wehave to attend to our needs at each level before we canmove higher. And as we encounter a setback, we have tosatisfy our most basic needs before we resume our progresstoward financial independence.

I’m sure that most people can articulate many financialneeds but these are the common needs which I have ob-served give the greatest number of people the highest senseof security.Excerpt with permission of the publisher Per Capita Publish-ing. Available at bookstores, ISBN:978-0-9739375-0-3,$18.95.

Dale’s note: After paying off his mortgage and feelingthe anxiety which accompanied this experience for him,Francis started thinking about the emotional side of finan-cial security. Today, he helps people gain a deeper under-standing of their relationship with money.

This book brings forth ideas, often simple ones, thatwill help the reader feel more secure about money matters.Francis provides practical advice and a simple frameworkthat you can use to achieve a better sense of financial com-fort.

This book is all about stretching your dollars throughcommon sense and savings. It is not an investment book.It is written for the novice who is just starting out on herroad to financial comfort. Here’s the basics of financialplanning which we can all put in place, if we have thewill to do so.



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CHAR

T N

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: M

orni

ngst

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as m

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sign

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ges

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und

cate

gorie

s. M

orni

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tate

s: “

The

chan

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cat

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sim

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ill p

lace

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m i

nto

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sam

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tego

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For

a f

ull ex

plan

atio

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sit

http

://w

ww.

mor

ning

star

.ca/

cate

gorie

s.

Addi

tion

al c

ateg

orie

s ar

eof

fere

d at

htt

p://

ww

w.ca

nadi

anm

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save

r.ca/

rc_c

hart

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px f

or a

ll m

embe

rs.

n Ye

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The

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age

annu

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ualiz

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rate

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und

has

perf

orm

ed o

ver

the

last

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yea

rs.

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rest

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qua

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Mor

ning

star

Pal

Trak

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orni

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anad

a, (

800)

531

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5, h

ttp:

//w

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mor

ning

star

.ca.

Cana

dian

Por

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So

me

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Por

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ten

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var

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to

capi

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se f

unds

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thr

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tim

e.


http://www.morningstar.ca/categories

http://www.canadianmoneysaver.ca/rc_charts.aspx

http://www.morningstar.ca


The Professional Advisor

A Full Suite of ETFProducts

John De Goey

For years, some people have lamented the painfullyslow rate at which Canadians embraced Exchange-Traded Funds (ETFs). Given the events of 2006,I think it’s fair to say the Canadian ETF market

has hit its stride.On top of the ETFs released by Barclay’s in the spring of

2006 (“Canadian ETF Market Matures”, March/April2006, Canadian MoneySaver) and those released by Clay-more later that summer (“The Next Step in ETF Develop-ment”, October 2006, Canadian MoneySaver), we now haveanother bunch of ETFs coming to Canada to round outthe offerings already available. As such, I suspect that 2006will go down in history as the year that ETFs entered themainstream of Canadian investment options. Sure, ETFshave been around for years, but 2006 was the year thatCanadians essentially “got it” in terms of looking for cheap,pure and highly tax-effective investment vehicles to buildtheir portfolios.

In November, Barclay’s announced that they were releas-ing five new iShares into the Canadian marketplace. Theyare Canadian Long Bond Index Fund (XLB), Canadian Gov-ernment Bond Index Fund (XGB), Canadian Corporate BondIndex Fund (XCB),Canadian Value Index Fund (XCV), andCanadian Growth Index Fund (XCG).

Rajiv Silgardo, the CEO of Barclay’s Canada, said “In-vestors asked us for iShares funds which provide exposureto more segments of the Canadian bond market, and tovalue and growth characteristics in the Canadian equitymarket, and we’re pleased to satisfy these investor needswith the launch of these new iShares funds.”

By adding three new bond ETFs to the three they hadalready released, the people at Barclay’s feel they can nowallow investors to customize the Canadian fixed-incomeportion of just about any portfolio. The objectives of XLB,XGB and XCB are to provide income by replicating, asmuch as possible, the performance of the Scotia CapitalLong Term Bond Index, the Scotia Capital All Govern-ment Bond Index and the Scotia Capital All CorporateBond Index respectively (net of expenses).

As a result, if one has an opinion on forthcoming changesin interest rates, one could modify the duration of one’sbond position quickly and easily. Similarly, if a person’sview changes regarding credit spreads or other market-drivenevents, that person can now act accordingly. Of course, itshould go without saying that one could also have a setposition on these and other factors and buy a suitable mixof ETFs that are held in virtual perpetuity, too.

On the Canadian equity side, the need for style diversi-fication has been obvious since TD left the Canadian ETFmarket a couple of years ago. The introduction of the XCVand XCG iShares restores the ability for investors to tilttheir portfolios based on preferred styles. Specifically, XCVaims to replicate the Dow Jones Canada Select Value Indexand the XCG aims to replicate the Dow Jones Canada Se-lect Growth Index—again, net of expenses in both cases.And if an investor has no strong opinion on these matters,there are already some useful market-neutral ETFs avail-able that would allow for that too.

When I mention that ETFs are becoming mainstreaminvestments, I’m not just engaging in hyperbole. By theend of the third quarter in 2006, Barclay’s Canada alonewas managing over $66 billion in Canadian assets, includ-ing over $13 billion in the TSX-listed iShares. AlthoughETFs constitute only a little over 2% of the approximately$600 billion Canadian mutual fund market, it’s still im-pressive given that there was precious little invested in ETFsin Canada at the turn of the millennium.

Given the breadth and depth of products available today, Iwould only expect that trend to continue. In fact, I expectETFs to accelerate their trend in capturing a significant shareof the Canadian investment product market in the years ahead.The New Year (and the time thereafter) looks bright for ETFsin their bid to capture market share largely because of theexcellent spadework that was laid in 2006.John De Goey, CIM, FCSI, CFP, Senior Financial Advisor,Burgeonvest Securities,170 University Ave., Suite 704,Toronto, ON, M5H 3B3 (866) 884-0895 or (416) 216-6588, [email protected]. The views expressedare not necessarily shared by Burgeonvest Securities Limited.



Money Sense

Personal FileManagement – Part Two

Brenda MacDonald

I n my previous article “Personal File Manage-ment - Part One” (in last month’s issue) I de-tailed how to organize and file personal papersto make money management simpler. I would like to

continue this month by discussing further organization ofpaperwork for long-term care and estate planning purposes.

In the event of your untimely death or incapacity, yourexecutor and/or power of attorney will need to know whereto find important personal information and financial docu-ments. It would be very helpful if you could gather, organ-ize and prepare this information for your loved ones aheadof time.

Be very conscious of security when you collect all of thisdata—there will be a lot of confidential and valuable infor-mation that you don’t want lost or stolen.

I hope you have some room left in your new filing cabi-net after last month’s exercise. If so, set aside a few files tohold the following information:

The name, address and phone number for your doc-tor, specialists, pharmacist and preferred hospital.

Contact numbers of all the people you would like tohave notified in the event of a major illness or death. Givefull names and addresses of relatives and beneficiaries. Listnames and contact information for informing your lawyer,accountant, employer, insurance agent, minister, neighboursand friends. If you have young children, list contact infor-mation for your child’s guardian, teacher, babysitter anddaycare.

Instructions for turning off the security system in yourhome as well as the location of any hidden keys on the prop-erty. Write down the name, address and phone number ofanyone who has an extra key to your home or cottage. Makea list of computer passwords for your home computer.

The location of financial and other personal recordskept within your home. Write down where to find the origi-nal copies of your will, power of attorney and any trustsyou might have. Record the location of your safety depositbox as well as the location of the key to your safety depositbox.

If you own a business, list the name, address and phonenumber of your employees. Also leave a schedule and com-pensation arrangement of people working for you.

If you have a long-term care insurance policy, leaveinformation showing the company and agent contact num-bers.

List the name, address and phone number of your pre-ferred nursing home, retirement home and funeral home.Detail any pre-arrangements that have been made for cus-todial care.

Write down details of your wishes and anything thatyou have already taken care of or pre-arranged for yourfuneral. Do you intend to be an organ donor? Would youlike to be cremated or buried? Would you like your bodyembalmed or donated to science? Have you bought a burialplot and headstone?

In order to prepare a registration of death for vital statis-tics and to process a death certificate, the funeral homeneeds the following data:• The deceased person’s full legal name, including maiden

name if female,• Date of birth,• Date of death,• Birthplace,• Social insurance number,• Personal health care number,• Father’s full name,• Mother’s full maiden name,• The full name of the surviving spouse, if there is one,• Occupation, industry worked in and for how long,• Religious affiliation.

The funeral directors will also need to know if the de-ceased was a military veteran and would do a means test todetermine if the deceased qualifies for any financial aid fromthe Department of Veterans Affairs for the burial. It is im-portant to have these details on file for your executor.

Keep this information up-to-date and make sure yourcaregiver/executor always has a current copy if changes havebeen made to anything. It will make their job so mucheasier if all of the information is readily available to them.



Every person will have unique needs for their individualcircumstances.

I’m sure there are some things I haven’t thought of orcovered here but I’m hoping this will at least get you think-ing of your own situation so you actually sit down and starta list. It’s not just our parents and elderly friends, neigh-bours and relatives who need to do this!

Brenda MacDonald, CFP, Fee-Only Financial Planner, 112Harpooner Place, Nanaimo, BC, V9V 1C3 (250) 756-0143, [email protected]

Back to Basics

RRIFs – The Basics

Kirk Polson

In my return to writing for Canadian MoneySaver inthe November/December issue I mentioned that I’dget back to basics and initially cover the basics of wind-ing down RRSPs. RRIFs, LIFs, LRIFs, and annuities

are popular topics among Canadians in their 60s and 70s.What I hope to do is walk you through your options andprovide valuable tips to help you avoid costly mistakes.

In the years leading up to retirement it’s likely you’vefocused strictly on accumulating wealth and given littlethought on how to generate the cash flow you’ll need inretirement. Most of us reach retirement with three pools ofsavings:

➜ Registered plans such as RRSPs, or employer-spon-sored defined contribution pensions (DCPP) or de-fined benefit pension (DBPP) plans or deferredprofit-sharing plans (DPSP);

➜ Non-registered savings which can be in many forms:stocks, bonds, cash, real estate, mutual funds,among others;

➜ Government pensions including Canada PensionPlan (CPP) and Old Age Security (OAS) benefits.

As retirement income specialists, our role is to help youcreate the cash flow you need on a tax-efficient basis, as

well as to provide ongoing income strategies, and tax andinvestment advice during your retirement years. For manyclients there is also the objective of preserving wealth forfuture generations.

In the case of RRSPs, there is nothing to stop you fromwithdrawing money prior to the end of the calendar yearin which you turn age 69—the point where you are forcedto select a retirement income option—and pay the taxesowing. Cashing out has always been an alternative and willcontinue to be so in the future. Just remember that whenyou take money out of an RRSP it’s fully taxable and thefinancial institution concerned is required to withhold in-come taxes according to a prescribed schedule, and thenpay you the difference. You could owe more tax on filingyour annual return, depending on your tax bracket.

It’s best to think of retirement income vehicles, i.e. RRIFs,LIFs, LRIFs, and annuities as pensions. While there aredistinct differences, they all pay you periodic income inretirement, which is just what a pension does. When youconvert to one of these vehicles, your RRSP is transferredwithout incurring any immediate income tax burden, andyou pay tax as money is withdrawn.

The Registered Retirement Income Fund (RRIF) hasbeen around since 1978 but was not particularly popularuntil 1986 when significant legislative changes were intro-

MoneyTips$2B Man

Charles Larente has $2B dollarsof assets under management. He isa Montreal stockbroker withScotiaMcLeod Inc.

Jonathan Chevreau of the “National Post” reported thatLarente’s clients invest in “individual North Americanstocks, mostly quality blue chips paying dividends. Infixed income, he focuses on high-quality bonds ratedAAA, AA or A, and preferred shares rated P1 or P2.”



duced. At that time Canadians were given unlimited flex-ibility and control over their retirement income, and thepopularity of the RRIF took off to the point where it is byfar the most common option chosen today. In rewritingthe rules back in 1986, the government made a major changeby allowing RRIF holders to withdraw any amount eachyear, as long as they took out at least the minimum.

The minimum payout under a RRIF is based on eitheryour age at the end of each calendar year, or if you make anelection, your spouse’s age. There is an advantage to using ayounger spouse’s age in that the amount you have to with-draw is lower, thereby keeping your taxable income down.Have a look at the table below. It illustrates the percentageof your plan that has to be withdrawn in the year followingthe age shown.

For example, let’s say you had your 80th birthday dur-ing 2006 and had $100,000 in a RRIF as of December31st. Then, in 2007, you must withdraw a minimum of8.75% or $8,750. It doesn’t matter whether you take thisamount out monthly, quarterly, semi-annually, or annu-ally, you still have to withdraw a minimum of $8,750 in2007.

(Tip: If you don’t need the cash flow, postpone yourpayment to the end of each calendar year to allow yourplan to build up. The amount will still be based on thevalue at the previous December 31st and your age at thattime).

Now let’s also assume our 80-year-old had the foresightto marry a younger spouse, say someone age 70. Then, inthat case, it would be wise to elect to have the youngerspouse’s age used to determine the minimum payout per-centage, in our example only 5%, or $5,000. So, our 80-year-old can postpone $3,750 of taxable RRIF income. And,if our 80-year-old needs more income from her RRIF shecan easily withdraw more.

There is more to setting up a RRIF than deciding onterms of payment. You must also wrestle with the issue ofhow to invest your money to create the cash flow you need.I’ll go into this topic in the next issue. In the meantimehere are a couple of other items that will be of interest.

Pension SplittingLargely lost in the federal government’s October 31st

announcement that chopped billions off the valuation ofincome trusts was a proposal to allow couples 65 or over to“split” “pension” income for tax purposes.

Currently, with the exception of CPP (Canada PensionPlan) income, Canadians must declare pension income intheir individual names. (CPP can be split between spouseswhen both are age 60 or over.“Splitting” means that thisincome can be divided between two spouses so that as acouple they pay less tax than would be the case if one ofthem declared the full amount.)

The proposal will allow the splitting of pension incomefrom employer-sponsored pension plans, RRIFs, and an-nuities from RRSPs or DPSPs, by Canadians age 65 andover. This will be a huge benefit to couples where one ofthem has much higher pensions than the other. For exam-ple, we still see many older couples where one spouse, his-torically the husband, has a pension from his employer andhis wife has little more than a split of CPP income alongwith OAS benefits, and perhaps some investment income.This group will be the biggest beneficiaries of this proposalas the spouse with the employer pension will be able toelect to declare up to 50% in the lower income spouse’s taxreturn.

Some have suggested that this proposal might be thedemise of spousal RRSPs which allow a higher earningspouse to build up RRSPs in the lower earning spouse’sname in order to create pension income on retirement.However, since the new proposal to split pension income isonly available at age 65, spousal RRSPs will still benefitthose retiring before age 65.

FeedbackWhen I asked for your questions and concerns regard-

ing RRSPs, RRIFs, and annuities in the last issue, I had noidea that I’d receive the response that I did. I guess that Ishould have realized from Canadian MoneySaver membersI was bound to get a few dozen e-mails and telephone calls.Thank you. You’ve given me some excellent ideas for fu-ture columns.

I will answer all e-mails, although some of you caughtme in a busy period just after the October 31st incometrust announcement, so I wasn’t very timely in my replies.Returning telephone calls to the far ends of Canada is notalways possible. So, if I missed you, I apologize.

MINIMUM RRIF WITHDRAWALS

Age Payout Percentage Age Payout Percentage69 4.76% 82 9.27

70 5.00 83 9.58

71 7.38 84 9.93

72 7.48 85 10.33

73 7.59 86 10.79

74 7.71 87 11.33

75 7.85 88 11.96

76 7.99 89 12.71

77 8.15 90 13.62

78 8.33 91 14.73

79 8.53 92 16.12

80 8.75 93 17.92

81 8.99 94-100 20.00



MoneyTipsOuch!

In a 2004 study, a York Univer-sity professor found that rollingover 1-year GICs during theprevious 30 years would have

produced a negative real after-tax return in non-regis-tered plans.

This result would have been achieved by taxpayerswith a marginal tax rate exceeding 35.5%. (There was notmuch difference for 3 or 5-year GICs as inflation andtaxes took their toll.)

One thing that is impossible for me to do is to givesolutions to individual financial situations by e-mail ortelephone. I might be able to give you some generaldirection or point you to someone with expertise in yourprovince, otherwise it’s a little bit like trying to get aprescription from a doctor over the telephone. Using ourWorry-Free Retirement Experience (seewww.worryfreeretirement.com), my associates and Ifollow a 10-step process that begins with a face-to-facemeeting with prospective clients to discuss goals andobjectives. We adhere strictly to this approach for bothpractical and regulatory reasons.

Kirk Polson, CFP, CLU,CH.F.C., Fee-Based FinancialPlanner, Polson Bourbonniere Financial Planning, 7050Woodbine Ave, Suite 100, Markham, ON (416) 498-6181or (800) 263-0120 [email protected]

The New Retirement

Learning about Life

Patrick Longhurst

It’s a while since I contributed a column to MoneySaver,for which I apologize. But that doesn’t mean I haven’tbeen thinking about you!

For most of this year I have been developing fi-nancial models for my clients and have come to at leastone critical conclusion. We are all different! There are norules of thumb which adequately cover the planning proc-ess. Without getting to really understand an individual, Icertainly cannot tell them:• How much they need to save before they can retire.• What pension option they should select when they do.• When is the best time to start RRIFing their RRSPs.

While this may not seem like rocket science, it amazesme how much space is taken up in the popular press deal-ing with the question, How much is enough?

When creating a financial model, the first meeting isusually spent:• Understanding the client’s objectives, both lifestyle

and financial;

• Collecting data relating to current assets, liabilities,sources of income and basic expenses;

• Developing expectations for their investment ratesof return, the future rates of inflation and their lifeexpectancies; and

• Discussing future expectations for salary increases,routine and one-time expenses, savings rates andother sources of income.Then comes my big question, What is your primary is-

sue? The typical answer: Does my plan hang together?At the second meeting there is usually an initial feeling

of trepidation. Financial projections are not intuitive. Willit be good news or bad? Frequently the news is good. Ratherlike the traditional peeling of the onion, this spawns a wholegroup of new questions:• Could I actually spend an additional $2,000 per year

on vacations?• Would it save tax if I split my CPP with my spouse?• What if I RRIF my RRSPs at 60 rather than 69?


http://www.worryfreeretirement.com


If the news is bad, there are usually some redeemingfeatures:• This retirement age doesn’t seem to work, but you

could afford to retire two years later.• If you could survive with only one car, then things

would look a lot better.• Are you sure you really want to take those big vaca-

tions in your 80s?In other words, the process of financial modeling in-

volves circling around the situation, fine-tuning as you go,until you reach an end state which represents the best esti-mate of a viable future. I have heard this likened to the“Christmas Carol” approach where Ebenezer Scrooge isgiven a vision of his future. But the vision may change ifScrooge can mend his ways!

The biggest surprise for many individuals is the impactthat government benefits (CPP/QPP and OAS) can haveon their financial situation. Many seem to discount thesebenefits and to assume that they will not be there whenthey need them. I take a far more positive approach. I be-lieve that the 1998 changes to the Canada Pension Planreally reinforced the funding of these benefits. Also, whilethe OAS is subject to a clawback for high-income earners,many of us will never reach the threshold income for theclawback (currently around $62,000) and will receive thefull benefit.

The biggest surprise for me is that everyone does notlead their lives the way that my wife and I do! For example,in our household we have a joint account which pays allday-to-day bills. I have discovered that many couples haveseparate bank accounts and complex formulae which dic-tate who pays for what. Neither approach is “right”. It isjust one of the interesting differences which makes everysituation unique.

The Future of our Pension SystemOver the last few months I have also had the privilege of

being the national speaker for the Canadian Pension andBenefits Institute. This has given me the opportunity tovisit various cities and present my chosen topic, “The Fu-ture of the Canadian Retirement Income System”. My start-ing point is that the major building blocks of the systemhave all been in place since the 1960s. My question to theaudience is whether it is reasonable that this structure canstill be the best solution for Canada, given the economic,demographic and political changes which have taken placein the last forty years. I am not pre-judging the answer, butI do believe that it is worth asking the question.

Of course, the major issue is, Who should get the ballrolling? Given Canada’s multi-layered approach to pensionprovision, this is not obvious:• The federal government is responsible for OAS and

GIS.

• Most provinces have additional, means tested, pro-grams to supplement the incomes of low-incomeCanadians.

• The provinces, acting together (with the exceptionof Quebec) are responsible for the Canada PensionPlan, which is then administered by the federalgovernment. Quebec is responsible for the QuebecPension Plan.

• Registered Pension Plans are supervised by the prov-inces, except for those which fall under federal juris-diction.

• RSP contribution rules are established by the CanadaRevenue Agency.

At the present time it does not appear that a wide-rang-ing pension review is on the agenda of the federal govern-ment. Individual provinces are making changes to theirPension Benefits Acts, but these changes are still piecemeal,rather than being integrated to cover all the elements of thesystem. With the baby boomers aging, it would be shortsighted to wait until this situation becomes a crisis. If thisconcerns you, I suggest you write to your local MP andMPP/ MLA.

Recent Proposals on Income SplittingWhile Finance Minister Jim Flaherty was dropping his

income trust bombshell, there were other, less publicized,proposals in his paper. One of particular interest to me wasthe suggestion that, starting in 2007, individuals will havethe ability to split their pension income with their spousefor tax purposes. For those under 65, the income must be alifetime annuity payment under a Registered Pension Plan(either defined benefit or defined contribution). For thoseover 65, the income can also be from a RRIF, an RRSP ora Deferred Profit Sharing Plan (DPSP). My understandingis that this is not cash sharing, as in the sharing of the CanadaPension Plan. Rather, it is a device for transferring incomefrom one spouse to the other for tax purposes only, i.e. apaper transfer.

For those of you who are actively planning for your re-tirement years, this may be a significant issue, assumingthat it is passed into law. Many of us have had to resort tothe use of spousal RRSPs to create some income splittingin retirement. Now we have a potential new tool, whichwill be particularly attractive for members who are plan-ning to retire early under an RPP, and to take a lifetimebenefit. Keep an eye open to see if this actually becomeslegislation.

Patrick Longhurst, President, Patrick Longhurst AdvisoryServices Inc, Toronto, ON (416) 815-7200,[email protected]



Family Wealth Planning

Planning For TheDisabled

Ed Arbuckle

What Churchill said about the actions ofRussia most of us can say about planningfor the disabled: “It is a riddle wrappedin a mystery inside an enigma.” Although

I have practiced taxation for many years, I have never to-tally come to grips with planning for the disabled because Ijust don’t fathom the details. I have a grandson, Damon,with a perfect personality and a heart as big as a house butwith some disabilities—so that has made me determinedto master this arcane subject.

I have read everything that I can put my hands on aboutthis topic but opinions on most things vary—sometimesdisagreeing and usually confusing. In my quest to put it alltogether, I purchased a copy of a book published by theOntario Federation for Cerebral Palsy, Removing the Mys-tery - An Estate Planning Guide for Families of People withDisabilities. I called the Federation and found them to beextremely helpful. I read their book from cover-to-coverand it moved my knowledge further along. Then I calledDale Ennis and agreed to author three or four articles foryou on the subject. So, here we are.

I have always had some nagging questions about Hensontrusts (a pivotal mechanism in funding the needs of the disa-bled) and took the opportunity to call Graeme Treeby of TheSpecial Needs Planning Group and author of the cerebral palsybook. Graeme’s website is www.specialneedsplanning.ca. Heanswered my questions and indicated that he would be gladto edit my MoneySaver articles. I have taken him up on that,so there are now two hands in this basket. These articles willbe based on Ontario’s law and may have different applica-tions in other provinces.

When I talk to parent and sibling relatives about plan-ning for the disabled, their eyes glaze over. I think a majorproblem is that planning techniques espoused by advisorsare not sorted into understandable bites. There is no roadmap to show how they relate to each other. And then thereis also the problem of interpretation of rules and regula-tions based partially on the law itself but more so on gov-ernment interpretations and dicta.

When people write about planning for the disabled they

unfortunately provide fuzzy interpretations. And there isthe problem of talking to someone in government who ismore than likely giving information from guidebooks. Somore fuzz comes into the picture with wiggle room and, ofcourse, “you should get legal advice”. I will try to remedythese barriers by breaking the many issues down into man-ageable parts with understandable explanations.

People with disabilities are likely to get financial help ortax relief in three different ways:• Tax credits and other tax relief under the Income Tax

Act,• Income from the Ontario Disability Support Program

(ODSP), and• Good planning that maximizes these tax incentives and

ODSP benefits.The definition of a “disabled person” for Ontario dis-

ability benefits is similar but not identical to the definitionin the Income Tax Act. Graeme Treeby indicates that “themedical requirement of being disabled … requires that theindividual be unable to function independently in variousaspects of his or her life.” The ODSP Act defines a personwith a disability as follows:• A person who has a substantial physical or mental im-

pairment that is continuous or recurrent and expectedto last one year or more,

• The direct and cumulative effect of the impairment onthe person’s ability to attend to his or her personal care,function in the community and function in a workplace,results in a substantial restriction in one or more of theseactivities of daily living, and

• The impairment and its likely duration and the restric-tion in the person’s activities of daily living which havebeen verified by a person with the prescribed qualifica-tions.The Income Tax Act defines a disabled person slightly

different in three ways, any one of which qualifies a personfor income tax credits:• You are blind, even with the use of corrective lenses or

medication;• You are markedly restricted in the basic activities of daily



MoneySaver EventsThe activities listed here are those

attended by Dale Ennis and otherMoneySaver staff. MoneySaver does notmake transcripts available for any ofits seminars.

➥ Saturday, January 27, 2007 isthe date for our next one-day invest-

ment conference. It will be held during the four-dayFinancial Forum trade show at Metro Toronto’s Conven-tion Centre near the VIA station.

Our theme “Investing for Your Future” succinctlydescribes the practical focus for the day. For completedetails, see pages 41 and 42.➥ Canadian MoneySaver is sponsoring 2 seminars atToronto’s Financial Forum.

On Friday, January 26 at 3:15pm in the HeadlineTheatre, Richard Kang will discuss “ETF-Based Portfolios:From Basic to Complex” - Exchange-Traded Funds (ETFs)have grown globally both in numbers and by asset size.ETFs now exist for everything from basic exposure toCanadian equities to specialized sectors likenanotechnology. Nearly every asset class is covered andif not, an ETF is likely in the works. This allows anyinvestor to build a portfolio with any degree of sophisti-cation. Richard will start from basic portfolios andgradually move to strategies associated more with hedgefunds.

On Sunday, January 28 at 3:15pm in the HeadlineTheatre, John De Goey offers a seminar on “WorkingTogether” - How’s the relationship between you and youradvisor? Later this year, the Client Relationship Modelwill be coming into effect. Will you and your advisor beready? What sorts of things can be done to ensure yourrelationship is mutually beneficial and that the responsi-bilities and expectations of all parties are clearly docu-mented, current and compliant? We’ll look at compensa-tion disclosure, real and perceived conflicts of interest,investment policy statements and letters of engagement.

These seminars are free by registering with FinancialForum. We look forward to chatting with you.

➥ Join MoneySaversin San Miguel deAllende, Mexico for ourlifestyle conference onNovember 12-14,2007. See page 38 forfurther details. Ourwebsite also offersmore backgroundinformation.

living (walking, speaking, hearing, dressing, feeding,elimination, perceiving, thinking and remembering); or

• You need and must dedicate a certain amount of timespecifically for life-sustaining therapy.Notice that you need to meet all three qualifications for

ODSP assistance but only one of the criteria for incometax credits.

We now at least know how disabled people are definedunder both acts. Future articles will move forward to dis-cuss the important issues. We invite readers to send yourquestions so that the following articles will give a full vent-ing of issues that are troubling folks with a disabled familymember.

Ed Arbuckle, FCA, CFP, TEP, Personal Wealth Strategies,Fee-Based Family Wealth Planners, 205-30 Dupont StreetE., Waterloo, ON (519) 884-7087 or (877) 883-3970,[email protected]

Get in the Game!The winner of the 2006

Challenge Game was theSaanich/Victoria Club. Thefinal results are posted on

the ShareClub page of CanadianMoneySaver.ca. Wecongratulate all those who participated.

Challenge Game 2007 closes on November 30, 2007.You can participate in the Game by selecting the topthree Clubs that will be in the winners circle. To assistyour decision making, the portfolios of each member Clubplus the standings are posted on the MoneySaver websiteat http://www.canadianmoneysaver.ca/ce_sharec.aspx.No other data will be provided.

To complement your effort, a gift of a Canon digitalcamera is offered for the first entry received that providesthe names of each of the three winning Clubs in rankorder, i.e. first, second and third place finishes. Thesecond gift of a one-year online membership to CanadianMoneySaver will be awarded to the next ten participantsfor naming the top three Clubs, not necessarily in rankorder.

First received entries will take precedence in theselection of winners.

Contest entries must be submitted to the ChallengeGame trustee no later than March 2, 2007. It must beunderstood that each Club may choose to rebalance theinitial portfolio according to the Game rules. Contestsubmissions are made to the Challenge Game trustee(Alex Kobelak) by e-mail at [email protected] and mustbe received before midnight on March 2, 2007.

Only one entry per contestant will be accepted. Yourfull name, mailing address and e-mail is required withyour entry.

http://www.canadianmoneysaver.ca/ce_sharec.aspx



JJJJJoin other MoneySavers at our lifestyle conference fromNovember 12-14, 2007 in San Miguel de Allende—often called the jewel in the crown of colonial Mexico.

Accommodation/ServicesWe have chosen 3 properties within easy walking distance of the

best restaurants, galleries, shops, entertainment and the Jardin (thesocial centre of San Miguel) as our accommodation sites. All 3 prop-erties are within a block of each other and are highly recommended.

The 2 Casa Luna locations (5 stars) have a total of 25 rooms withprivate bathrooms, fireplaces and mosthave private patios. Room rates (U.S. dol-lars) include the 17% tax and full break-fast. Rates vary from US $145 to US $156(single or double) for the period of No-vember 9-18 but are only guaranteedavailable until March 31, 2007. Visitwww.casaluna.com for complete views ofthese spectacular properties. ContactSusana at (210) 200-8758 to make ar-rangements.

Villa Mirasol is a 2-storey boutiquehotel (4 stars). Each of the 10 rooms hasa private bathroom and a sunlit patio orbalcony. Room rates include the 17% taxand full breakfast. Rates vary from US$115 to US $135 for the period Novem-ber 9-18 but are only guaranteed avail-able until May 31, 2007. Visitwww.villamirasolhotel.com or callEvangelina at 011-52 (415) 152-6685.

Both businesses accept credit cardsand can arrange transportation to andfrom the airports. Ask about sharing a vehicle to lower the cost perperson. (Bus service is less convenient but also less expensive.)

Exclusive cooking classes can be arranged during your stay as well asprivate folk art and area tours, etc. Leandro Delgado, a licenced guide,will be on hand to offer customized tours.

AirfareThe 3 neighbouring cities are Leon, Mexico City and Queretaro, Mexico.

Queretaro, the closest city can be accessed from Houston on Continen-tal for example. Dale and Betty have experienced traveling through all 3cities. If you need assistance, call us.

Conference AgendaMonday, November 12, 200710:00am-12:30pm - Exclusive walking tour of central San Miguel.2:30-5:30pm - Presentations5:30-7:00pm - Opening reception with refreshments.Tuesday, November 13, and Wednesday, November 14, 200710:00am-12:30pm - Optional house tours and private consultations.2:30-5:30pm - Presentations

Presentations

➤➤➤➤➤ Dianne Kushner - Our gracious hostess offers a welcomepresentation to introduce you to San Miguel. She’ll discussestablishing her hospitality business, investments and living

in San Miguel. Dianne is a 13-year, full-time resident in thecity and visited it since the early 70s.

➤➤➤➤➤ Fernando Gonzalez – Lloyd’s manager will outline variousfinancial services available to residents of Mexico. He’ll focuson investment funds and banking services for daily living.

➤➤➤➤➤ Graciela Loyola - Co-owner of San Miguel ManagementCompany, will visit with you about insurance in Mexico. Gracielais an agent for “ING Comercial America”, the largest insurancecompany in Latin America. She will help you understand whatcoverage you will need for your home,automobile, medical and

life insurance and their related costs.➤➤➤➤➤ Peggy Blocker - Co-owner of SanMiguel Management Company, will talk to youabout buying, managing and renting your newhome in San Miguel. Peggy and Graciela will alsotalk about the cost of building a new home orremodeling the one you have just bought! Theircompany will also offer a “Tour of Homes forSale”.

➤➤➤➤➤ Mary Ann Ramirez – Mary Ann’s lawfirm provides legal consulting and litigation inreal estate, civil, business and corporate law.You’ll learn all the information you need to buyMexican real estate and how to protect yourselfand feel secure with your investment. Mary Annwill also explain the importance of a Mexican willonce a foreigner owns real estate.

➤➤➤➤➤ Norm Hair and Carol Schmidt – The co-authors of Falling…in Love with San Miguel:Retiring in Mexico on Social Security bring youtheir experiences with settling in San Miguel.Their frank and sincere comments will explain

how you can do it also.

There will be confirmation of other speakers next month.They’ll cover cross-border financial planning, a contrarian’sview of living in San Miguel and more.

Fee DetailsThe conference fee is C $169 (single) or C $199 (2 persons). Only 60

registrants will be accepted on a first-come, first-serve basis.

What’s Included?✔ all taxes,✔ exclusive walking tour,✔ opening day reception,✔ practical presentations with question/answer sessions,✔ consultation with reputable speakers,✔ personalized house tours,✔ sharing experiences with like-minded Canadians, and✔ and our small group ambience.

If you elect not to use our chosen accommodation, a supple-mental fee of C $50/person is necessary to offset conference-re-lated costs. We suggest you make your travel and accommodationarrangements first and then register for the conference. A confer-ence registration form is available at www.canadianmoneysaver.ca/ce_events.aspx or call 613-352-7448.

San Miguel Lifestyle ConferenceSan Miguel Lifestyle ConferenceSan Miguel Lifestyle ConferenceSan Miguel Lifestyle ConferenceSan Miguel Lifestyle Conference LIMITED SPACE.ACT NOW.

http://www.canadianmoneysaver.ca/ce_events.aspx

http://www.villamirasolhotel.com

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Unless you accompany your inquiry with your MEMBERSHIPNUMBER (ID), and telephone number or e-mail address, yourquestion will NOT be reviewed. “Ask the Experts” is a mem-bers-only service. (Not all answers are published here. Manymore are found on our website.)

This month we highlightthe contribution of PeterColes to this advisoryservice. Peter has taken onmore responsibility withH&R Block. Therefore, he isno longer able to acceptfurther inquiries. We havebeen very appreciative ofhis support over the years.

Lloyd Henry of H&R Blockin Kitchener has volunteeredto accept your inquiries. Wewelcome his participation.

➥ I sold the last of somerental properties. As thebuilding will be demolished,can I claim a terminal loss?The sales agreement doesnot give separate figures forthe land and building.M.V., e-mail

It appears that you soldthe property to someoneelse who then demolishedthe building. If that is thecase, the fact that thepurchaser demolished it isnot relevant to whether ornot you can claim aterminal loss. If thebuilding was disposed offor less than itsundepreciated capital cost,a terminal loss will result.

However, in the eventthat you incur a terminalloss on the sale of thebuilding and a capital gain

on the sale of the land,special rules apply. Theeffect of these rules is toreduce the loss on the saleof the building by theamount of the gain on theland. So you may berestricted in the amount ofthe terminal loss that youcan claim.Peter Coles

➥ Are dividends or interestearned by an RESP fromsources in the United Statesexempt from the U.S. tax,including distributions froman income trust classed as aU.S. (foreign) investment?D.B., St. Catharines, ON

The exemption providedunder Article XXI(2) onlyapplies to dividends andinterest paid to a plan“operated exclusively toadminister or providepension, retirement oremployee benefits.”

Unfortunately, it wouldtherefore not apply to anRESP (since an RESP isoperated to save for thebeneficiary’s education).Peter Coles

➥ My mother and I aretenants-in-common on acondominium. It is myprimary residence, and mymother lives elsewhere. If

we sell the condo, how isthe sale treated for taxpurposes?C.E., e-mail

In order to designate aproperty as a principalresidence, you have to ownthe property either “jointlywith another person orotherwise.” The CRA statesin IT437R Ownership ofProperty (Principal Resi-dence) that these wordsinclude tenancy-in-common.

You will therefore beable to designate theproperty as your principalresidence for the years thatyou lived in it. Assumingthat you can designate itas your principal residencefor all the years you ownedit, any capital gain result-ing from its disposition willtherefore be exempt fromtax.Peter Coles

➥ I have two grandchildrenwho live in the U.S., one is aCanadian citizen and theother was born in the U.S.They both have theirCanadian SIN numbers.I want to open joint invest-ment accounts in their namesand deposit their annualbirthday and Christmas gifts(say about $3,000 to $4,000a year) in these accounts.The money in the accountwill be used by the grandchil-dren in the future when theyare older.What are the implications ofthis strategy? What do I haveto carefully consider in ordernot to trigger any attributionrules on the investmentincome and gains?M.A., e-mail

The attribution rulesrequire that any incomeearned by property trans-ferred to a child or grand-

child be reported by you(the transferor of theproperty) until the year inwhich the child turns 18.These rules will apply eventhough your grandchildrenare not resident in Canada.

Although the attributionrules apply to incomeearned by property trans-ferred to a minor child,they do not apply to capitalgains. One possible way ofavoiding the attributionrules would therefore be togive them property withstrictly growth potential.This is commonly achievedthrough the medium of anin-trust account, which isoffered by a number ofdifferent trust companiesand other financial institu-tions. The transfer of yourproperty to the accountmust be irrevocable,meaning that any subse-quent withdrawal of fundscan only be made if it is forthe benefit of your grand-children.Peter Coles

➥ I have ADRs in myinvestment (non-RRSP)portfolio. Are my dividendsreduced by country of originand can I recover the taxespaid on my Canadian tax?J.M., e-mail

The rate of tax withheldfrom dividends paidthrough American Deposi-tary Receipts will dependon the country where thecompany is located. Mostof our tax treaties specify amaximum rate of withhold-ing of 15% ondividends.You will be ableto claim a foreign taxcredit for the tax withheldon the dividends. Thisdirectly reduces yourCanadian tax payable bythe amount withheld.Peter Coles



➥ Is there not a ceiling of$5,000 on the annualeducation amount that canbe transferred to a parent?R.T., e-mail

If your son has tuitionand education amountsthat he cannot fully utilizehimself, he may able totransfer part of the unusedbalance to you.

The maximum he cantransfer for federal taxpurposes is:1. The lesser of his tuition/education amounts and$5,000; minus2. The amount by which histaxable income exceeds theamounts he is claiming onLines 300 to 318 of hisSchedule 1.

So, if your son’s taxableincome in 2006 was $8,840and he was claiming onlythe basic personal amountof $8,839, the maximum hecould transfer would be$4,999.

A similar calculationgoverns the amount thatcan be transferred forprovincial tax purposesexcept that in Ontario, the$5,000 figure is increasedto $5,792.

Any unused amountsthat he cannot transfer toyou can be carried forwardand used by him to reducehis tax payable in futureyears. He will not have theoption of transferring anyof the amount carriedforward in future years.Peter Coles

➥ I currently hold anunregistered account with E-Trade. I also have aregistered account withanother brokerage firm withapproximately $250,000. Iconsider retiring in 2 yearsat the age of 50. AssumingI am earning zero income atretirement (I have accumu-

lated enough outsidesavings, plus my wifeworks), what kind of tax willI have to pay if I want toderegister my RRSP slowly,say $25,000 per year over10 years, while having nopersonal income? Is this abad idea or would I bebetter off getting a RRIF atage 50 with all funds frommy RRSP?R.A., e-mail

If your only income in2006 was an RRSP with-drawal of $25,000 and youwere claiming only thebasic personal amount of$8,839, you would havefederal tax payable of$2,465. As a resident ofAlberta, you would alsohave provincial tax payableof $1,010.

When you make thewithdrawal, the issuer willhave to withhold tax atsource. The rate of tax is10% on withdrawals lessthan $5,000, 20% onwithdrawals between$5,000 and $15,000 and30% on withdrawals inexcess of $15,000. Youwould claim the amountwithheld as a credit whenyou file your tax return.

If you were to convertyour RRSP to a RRIF, youwould have to withdraw aminimum amount eachyear. The minimum amountwould not be subject towithholding (although itwould be included inincome on your tax return).However, at your age, theminimum withdrawal wouldbe very small.

Other than that, Icannot see any advantagesin converting your RRSP toa RRIF if you are intent onderegistering the fundsbefore the age of 65 (atwhich time RRIF paymentswould qualify for the

pension income amount).Peter Coles

➥ In my RRSP I own ING,trading on the NYSE. Itappears the U.S. is taking afull 25% of the dividendsearned. Is there anything Ican do about this?G.B., e-mail

As you are apparentlyaware, the dividends shouldbe exempt from U.S.withholding under ArticleXXI(2) of the Canada-United States tax treaty.

This provision exemptsdividends and interest paidto a plan “operatedexclusively to administer orprovide pension, retirementor employee benefits.”

I suggest you send themForm W-8BEN, attached,quoting this article, torequest that they stopwithholding.Peter Coles

➥ If you purchased atimeshare 10 years ago for$10,000 and sold it thisyear for $6,000 can youdeclare the $4,000 as acapital loss in 2006?R.B., e-mail

Unfortunately youcannot claim capital losseson personal-use property.Unless it was an income-producing property, theanswer is, therefore, no.

If the property was anincome-producing property,the portion of the lossattributable to the buildingwould be a terminal loss(which is deductibleagainst other income). Theportion attributable to theland would be a capitalloss, deductible againstcapital gains.Peter Coles

➥ What are flow-throughshares?S.H., e-mail

Flow-through sharesessentially are investmentsthat permit tax deductions(available to naturalresource companies) to beclaimed by investors. If youbuy a flow-through shareyou can basically deductthe cost of the investmenton your tax return. Withina year or two the invest-ment will be converted topublicly traded securitiesbut with no cost for taxpurposes. The securitiescan then be sold and willbe taxed as a capital gain.

In essence, flow-throughshares allow a full taxdeduction when purchasedbut are only taxed at 50cents on the dollar whensold. They effectivelyconvert fully taxed incomeinto capital gains. I thinkthey are the best taxshelter around.Peter Coles, Tax Special-ist, H&R Block Canada,Calgary, AB

➥ My daughter-in-lawgraduated from universityand is presently engaged ina one-year internship forwhich she receives zerocompensation. She hasincurred many expensesincluding moving, carpurchase, rental accommo-dation, daily parking andauto expenses (because shehas a territory to cover). Allthe while, she still hasmonthly student loanpayments. Besides thestudent loan, is thereanything she can claim nowor in the future?T.S., E-mail

Unfortunately, yourdaughter-in-law would notbe entitled to claim any of



Canadian MoneySaver’s January 2007 Investment Conference

Investing for Your Future

You are invited to join Dale Ennis and seven con-tributing editors at our one-day conference on Satur-

day, January 27, 2007. This information-packed confer-ence will be held at the Metro Toronto Convention Centreduring the four-day Financial Forum—a financial tradeshow.

Presenters will provide you with the latest proven in-vestment strategies that you can apply immediately. Youcan also meet with them privately during the day.

LocationMetro Toronto Convention Centre (Front Street West), twoblocks west of the VIA station.

Schedule8:30am-8:50am – Registration8:50am-4:15pm – Presentations

What’s Included?✔ practical and advice-filled seminars,✔ question-and-answer periods,✔ private discussions with speakers,✔✔✔✔✔ valuable handout materials,✔✔✔✔✔ meeting like-minded investors,✔ prizes and,✔ free admission to Financial Forum.

Speakers and Presentations

Brian Quinlan, Chartered Accountant – TaxConsequences of Investing

When comparing investment opportunities thefocus is after-tax returns. Brian will review the taximplications of various investment strategies and

highlight how differences in tax treatment will be a majorfactor in making your investment decisions. Brian will alsoprovide an update on the many tax changes for 2006 and adviseyou how you and your family can make the best use of them in2007.

the expenses that you havelisted because she will nothave any taxable income. This year, however, if shelives in Ontario, she may beable to claim the OntarioProperty and Sales TaxCredit for her rentalaccommodation. Thestudent loan is a non-refundable credit andreduces tax payable andshe may claim that atanytime in the next 5 yearsagainst taxable income.

In future years, once shecompletes her internship,since she has a territory tocover, and begins receivingan income, she may qualifyfor auto expenses, parkingand Capital Cost Allowanceon her automobile. Inorder to do this, heremployer must completeand sign a T2200 (Declara-tion of Employment).Lloyd Henry, H & R BlockCanada Inc., Kitchener, ON(519) 743-9882

➥ I currently own a rentalproperty. If I was to pullout the equity to use as adownpayment on a singleunit home for me to live in,will I be able to deduct theinterest on the full amountof the now increased loanagainst my rental income orcan I only deduct theinterest if I am purchasingmore income-producingitems?P.B., e-mail

Money borrowed tocreate income for invest-ment purposes is alwaysdeductible as a carryingcharge on Schedule 4.Money borrowed for RRSPsis never deductible.

In your case the interestpaid on the loan would bedeductible as mortgageinterest on the rentalincome statement ofexpenses.Lloyd Henry, H & R BlockCanada Inc., Kitchener, ON(519) 743-9882

Consider MexicoCome to learn a new way of life from a

culture that goes back centuries beforeColumbus and Cortez. Find a way toenjoy life more fully and explore all thepossibilities of your future. Follow thestory of two women who overcame theirfears and found a new life far betterthan they could have experienced anywhere in the U.S.on Social Security.

Carol Schmidt and Norma Hair investigated many citiesbefore discovering San Miguel de Allende, a breathtak-ingly beautiful art and cultural centre 165 miles north-west of Mexico City. It’s been called one of the top tencities in the world to retire to by Conde Nast Travel andMoney Magazine.

In vivid detail, they describe their first year experiencingall of the fiestas that fill the Mexican calendar. They sharethe problems they ran into, the adjustments they learned tomake, what they pay for almost everything, and the newoutlook on life. And they’re doing it on average SocialSecurity in one of Mexico’s most expensive cities.

This book is their love story with San Miguel deAllende, and your window into a new way of lookingforward to retirement.

Falling…in Love with San Miguel by Carol Schmidt andNorma Hair, SalsaVerde Press, US$23.95, ISBN: 0-9787286-2-9. Order directly at www.salsaverdepress.com.

Dale’s note: Betty and I have visited the authors’home. Living frugally is their practice. However, they areliving a comfortable lifestyle which many of us wouldenvy and admire.


http://www.salsaverdepress.com

John Stephenson, Portfolio Manager – Secrets ofthe Skeptical Investor

Are you sick of corporate scandals that send stockprices spiraling downward? Are you confused aboutthe world of investments, yet know that you have to

make the most of your investment dollar? Do you know if thecompanies that you invest in or broker recommendations can betrusted? Where do you turn for unvarnished advice to ensurethat your financial future remains bright? In his talk, John willdemonstrate the secrets that he has learned, the sectors thatshould outperform and what you need to know now to investand prosper in the years to come.

Norm Rothery, Financial Consultant – The Mind,The Market and Defensive Investing

If you had to choose between a guaranteed gainof $3000 or take a gamble where 80% of the timeyou’d get $4000 and the other 20% of the time

you’d get nothing, would you take the sure thing or go for thegamble? Find out why most people opt for the sure thing whenexpecting gains but switch to the gamble when faced withlosses. Then join Norm on a guided tour through the bizarre,and sometimes humorous, world of investment biases andmental shortcuts that can help or hurt your portfolio.

Robert Floyd, Investment Counsellor – Making YourInvestments Grow when Interest Rates are Low

With interest rates at low levels, what can aninvestor do to improve absolute returns? Theanswer lies in developing an effective strategy for

managing your equity portfolio. This presentation covers someof the basics in managing a Canadian equity portfolio. Specificemphasis is placed on “growth at a reasonable price” style ofinvesting.

David Stanley, RetiredProfessor – Beating the TSX– It Works!

”Beating the TSX” issimple, quick, and histori-

cally outperforms any Canadian large-cap index or mutual fund. It will takeonly a few minutes a year to pick aportfolio of 10 stocks that has beatenthe index by close to 25% over thepast 19 years. The discipline it instillsin individual investors allows you toavoid questionable advisors, mutualfunds, technical analysis, options, highfrictional costs and unnecessary taxes,while preserving your capital andbuilding up a core portfolio ofCanadian blue-chip stocks. For thoseinvestors with courage and patience“Beating the TSX” is a way to improveportfolio performance in up, down,and sideways markets.

Canadian MoneySaver’s January 2007 Investment Conference

Toronto Conference Registration FormYes, I or we will be attending the full-day investment conference on Saturday,January 27, 2007. My cheque/Money Order/Visa/MC is enclosed for:

$28.50* ( 1 person) $57.00* (2 persons) * taxes included

Visa/MC Number: ________-________-________-________ Visa/MC Expiry:___/____

Card Holder’s Name: _____________________________________________________

Name: ________________________________________________________________

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______________________________________________________________________City Province Postal Code

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Mail/Payable: Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0Tel: (613) 352-7448 Fax: (613) 352-7700 [email protected]

Derek Foster, Author – Stop Working Now!Derek retired at 34 without an inheritance,

winning a lottery, or anything else. His approachchallenges the traditional dogma of saving millionsof dollars for retirement and instead focuses on

creating a stable income impervious to stock market correc-tions. Come and discover what Derek did (and what you can do)to obtain financial freedom.

Benj Gallander, Newsletter Editor and Author –Probability

Probability is the very essence of the risk-rewardratio that defines successful investing. Manyinvestors are all over the map with their methodolo-

gies to enhance wealth. Benj will simplify them by exploringseven rules that should lead to better financial returns at theend of the day.

How to RegisterPre-registration with payment is required to guarantee yourattendance. You may register by:

✔ telephone - 1-613-352-7448 (9 - 4:30 ET)✔ fax - 1-613-352-7700✔ online at http://www.canadianmoneysaver.ca/

ce_events.aspx✔ mail, up until 2 weeks prior to the conference date - PO

Box 370, Bath ON K0H 1G0

Non-members pay double the rate of members ($57/person)unless accompanied by a Canadian MoneySaver member.

http://www.canadianmoneysaver.ca/ce_events.aspx

Preferred Members’ Bonus➩ Renew at least 4 issues before your expiry date (second groupof numbers on the line directly above your name), and beforereceiving the renewal envelope bound inside MoneySaver.This way you won’t miss any issues. Extend as checked:

2 years + 3 BONUS issues @ $42.29 (GST included) NB, NL & NS residents: $45.49 (HST included).

1 year + 1 BONUS issue @ $21.15 (GST included) NB, NL & NS residents: $22.74 (HST included).

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MONEYSAVER, BOX 370, BATH, ON K0H 1G0PHONE: (613) 352-7448 (9-4:30 ET) FAX: (613) 352-7700WEBSITE: www.canadianmoneysaver.ca

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ber Services•Mem

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ber ServicesNew Members’ Discount

➩ Start Canadian MoneySaver magazine as checked:

2 years + 2 BONUS issues at $42.29 (GST included).THAT’S $41.45 OFF THE NEWSSTAND PRICE.

NB, NL & NS residents: $45.49 (HST included).

1 year (9 issues) at $21.15 (GST included).THAT’S $16.53 OFF THE NEWSSTAND PRICE.

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Online Service ➩ Start Canadian MoneySaver online service as checked:

2 years at $42.29 (GST included)/$45.49 (HST* included)

1 year at $21.15 (GST included)/$22.74 (HST* included)

➩ Add Canadian MoneySaver online service to print membership: Online upgrade @$1.76 (GST included) @$1.90 (HST* included)

times the number of issues remaining in current print subscription to

reach a common expiry date.➩ Start a combination Canadian MoneySaver online and print membership

as checked:

2 years at $74.09 (GST included)/$79.69 (HST* included) 1 year at $37.05 (GST included)/$39.84 (HST* included)

(* HST applies for NB, NL & NS residents.)

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Gifts➩ You may purchase gift memberships of Canadian MoneySaver forCanadians at the gift price of $21.15 (GST included). NB, NL & NSresidents: $22.74 (HST included).

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MONEYSAVER, BOX 370, BATH, ON K0H 1G0PHONE: (613) 352-7448 (9-4:30 ET) FAX: (613) 352-7700

Back Issues➩ Back issues are available at $2.35 (includes tax) each untilsupplies are depleted. We currently have March/April, May, July/Aug,September , October and Nov/Dec 2006. Prepaid orders only.

Please tell ustwo websites you visit regularly:

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Time to RenewIf your mailing address is printed BELOW, your membership

expires soon. Your expiry date is directly above your name.Use this coupon or the renewal envelope bound inside this

issue. No other renewal notice is sent to you.

YES, I WANT TO RENEW CANADIAN MONEYSAVER FOR:

2 years + 2 BONUS issues at $42.29 (GST included).

THAT’S ONLY 5 CENTS A DAY.NB, NL & NS residents: $45.49 (HST included).

1 year (9 issues) at $21.15 (GST included).

THAT’S JUST 38 CENTS A WEEK.NB, NL & NS residents: $22.74 (HST included).

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MONEYSAVER, BOX 370, BATH, ON K0H 1G0PHONE: (613) 352-7448 (9-4:30 ET) FAX: (613) 352-7700WEBSITE: http://www.canadianmoneysaver.ca


Documents

Canadian Money Saver Jan 2007