MARCH/APRIL 2017 Yes, Bonds Are Still An Important Exchange Traded Funds Versus Part Of A Portfolio Individual Stocks – Which Is Better? Ryan Modesto P. 25 Peter McMurtry P.15
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DunD urnpress | @ DunD urnpress | DunD urn.com EDITOR-IN-CHIEF - Peter Hodson MANAGING EDITOR: Lana Sanichar CONTRIBUTING EDITORS Ed Arbuckle, Margot Bai, Robert Barney, Dan Bortolotti, Ian Burns, Bruce Cappon, John De Goey, Donald Dony, David Ensor, Ken Finkelstein, Derek Foster, Benj Gallander, Robert Gibb, Andrew Hepburn, Shelley Johnston, Robert Keats, Cynthia Kett, Ken Kivenko, Camillo Lento, MARCH/APRIL 2017 Marie-Josée Loiselle, Alan MacDonald, Brenda MacDonald, Gina Macdonald, Robert MacKenzie, Ross McShane, SPECIAL FEATURES Ryan Modesto, Caroline Nalbantoglu, Tim Parris, Peter Premachuk, John Prescott, Kyle Prevost, Brian Quinlan, Wynn Quon, Rino Racanelli, Colin Ritchie, The Ultimate Guide To Robo Advisors - Part 2 Kyle Prevost 6 Scott Ronalds, Norm Rothery, Stephane Ruah, Allan Small David Stanley, John Stephenson, Brian Tang, Angelo Vicere, Becky Wong. Using A Discretionary Family Trust To Income Split Your MEMBERSHIP RATES - All rates for Canadian residents are Investment Portfolio With Spouses And Children Of Any Age Colin Ritchie 9 printed on the inside back cover. Non-residents of Canada may purchase the online edition only – at $24.95 for one New Rate Reset Preferred Shares With Floor Feature year’s service. Canadian MoneySaver (CMS) is published by The Are They Worth A Look? Stephane Ruah 12 Canadian Money Saver Inc., 55 King Street West, Suite 700, Kitchener, ON N2G 4W1 Tel: 519-772-7632. Small Business Owners And Professionals Office hours: 9:30 am to 1:30 pm EST Website: http://www.canadianmoneysaver.ca Have You Got Your Money Working For You? Allan Small 13 E-mail: [email protected] PRIVACY POLICY - CMS may make its members’ mailing Exchange Traded Funds Versus Individual Stocks list or e-mail addresses available to carefully screened com- – Which Is Better? Peter McMurtry 15 panies or organizations offering products or services that may be of interest to you. If you prefer not to receive these of- fers, send us your mailing label with “Do Not Rent” written Top Five Investing Myths Theodor Tonca 17 on it. (Required statement. We do not rent addresses.) Canadian MoneySaver publishes monthly with three Let's Go To The Store: double issues (July/Aug, Nov/Dec and March/April). Canadian MoneySaver is an independent, totally Richard Morrison 19 Three Canadian Retailers Investors Can Count On membership-funded magazine. The information contained in Canadian MoneySaver is Reader Questions Answered: Options Contracts Keith Richards 22 obtained from sources believed to be reliable. However, we cannot represent that it is accurate or complete. The views expressed are those of the writers and not necessarily those of Yes, Bonds Are Still An Important Part Of A Portfolio Ryan Modesto 25 The Canadian Money Saver Inc. Neither the information nor any opinion expressed constitutes a solicitation by us for the The Costs Of Investing Scott Ronalds 28 purchase or sale of any securities or commodities. Canadian MoneySaver is distributed with the explicit understanding that Canadian MoneySaver, its publisher or writers cannot The Elusive And Misunderstood Stability Clause be held responsible for errors or omissions. In Travel Insurance Policies? Isabelle Beaudoin 31 Shareholders of The Canadian Money Saver Inc, editors and contributors may at times have positions in mentioned investments/securities. REGULAR FEATURES Copyright © 2017. All rights reserved. Shareclubs 4 No reproduction, transmission or publication of any of the Sharing With You 4 contents of Canadian MoneySaver is permitted without the express prior consent of the copyright owner. To obtain Dividend & Company News 5 permission to use any part of Canadian MoneySaver, Model ETF Portfolio 5 contact Peter Hodson. Coming Events 9 ® – Canadian MoneySaver is a Registered Canadian Point Of View 30 Trade Mark of The Canadian Money Saver Inc. Printed in Canada ISSN: 0713-3286 Readers Write 34 We acknowledge the financial support of the Government Ask The Experts 36 of Canada through the Canada Periodical Fund of the Money Digest 38 Department of Canadian Heritage. Canadian DRIPs with SPPs 39 Canada Post Publication No. 40035485 Top Funds 40 MARCH/APRIL 2017, Volume 36, Number 6 Canadian ETFs 42 ShareClubs Sharing With You Join any of the listed ShareClubs by contacting your local volunteer. Like-minded members get together to share financial information. No cost. No obligation. Just an inquiring mind. The agenda for each group is shared by all group members, i.e. it is not just the responsibility of the contact person. ShareClubs are unlike investment clubs because they haven’t yet seen are meant to share investing information only. Contact MoneySaver and the movie, GOLD, volunteer to start a ShareClub in your area. When ShareClubs are filled, starring Matthew they are delisted. I McConaughey, which VOLUNTEER REGION CONTACT ONTARIO is based on the Bre-X Blake Hoo Ajax/Pickering [email protected] gold fraud, which cost John Mayo Aurora [email protected] investors $4 billion in Frank Attobelli Bolton 905-857-6527 1997. Not sure if I really James Bolen Caledon 416-617-7311 need to see the movie, though, having lived Ken Kyer Cornwall [email protected] Al Piccoli Georgetown [email protected] through that event as a small-cap fund manager. John Prescott Guelph [email protected] Sam Thai Hamilton [email protected] Through sheer luck, my fund in 1997 sold all of Matthew Moore Kincardine/Port Elgin 519-371-6592 its Bre-X shares before the fraud was exposed. The Francis Savage Kingston [email protected] company had simply become too big to be held in Richard Gerson Kitchener-Waterloo [email protected] my small cap fund. Sometimes, as you likely know, Bob Gauld London 519-657-4393 luck can still play a big role in investment success. Dipen Parekh Milton 647-745-2420 Paul Drummond Mitchell 519-348-9724 But the movie, in my view, could also be called Linda Sopoco Delfin Mississauga 905-858-5555 Jim Ashley Newmarket [email protected] ‘GREED’ as it was greed that fueled investors’ Peter Matsdorf North York I [email protected] appetite for more and more Bre-X stock (the stock Dominic Pun North York II [email protected] went from 25 cents to $200 per share). It was greed Gerry Hogenhout Orangeville 519-942-0220 that allowed analysts to ignore the fact that the Tom Loftus Oshawa 905-725-1979 wrong type of gold was showing up in gold assays Andre Albert Ottawa 613-741-2828 Volunteer needed Peterborough [email protected] from the project. It was greed from fund managers Paul Mintha Port Hope 905-885-8659 who ‘needed’ to own the stock so they could keep John Mills Scarborough 416-267-7993 up with their peer managers and the index, and get Jeff Danby St. George 519-753-7414 large bonuses. An entire town in Alberta invested Gary Poxleitner Sudbury [email protected] in the company, and then lost it all. Luke Zhang Toronto-Central [email protected] Ron Closs Thunder Bay [email protected] I was thinking of this the other day, as we Henry Lamasz Unionville/Markham [email protected] at CMS continue to get questions on the most ALBERTA speculative companies, binary options, leveraged William Wood Calgary SE [email protected] Dominic Tremblay Fort McMurray [email protected] ETFs and other so-called ‘investments’. Greed BRITISH COLUMBIA continues to drive the creation of new products, Ron Beaton South Delta, BC www.tlshareclub.com and investors continue to ignore the basics. If Lukas V. Kelowna/Okanagan [email protected] you are buying options, micro caps or leveraged Dave Hicks New Westminster, 778-875-2615 products, you are gambling, not investing. We do Brian Pearson Prince George [email protected] not think ANY investment where you could lose Karen Karefoe Queen Charlotte Is. [email protected] ALL of your money is worth any consideration at Bruce Lines Salmon Arm [email protected] all. The first rule of investment success, after all, Uta & Vic Parks Salt Spring Island [email protected] Sue Groom Sidney [email protected] is not to lose money. Bob Lee Ctrl. Vancouver [email protected] Robert Gibb Victoria [email protected] So next time you feel you are ‘stretching’ Russell Page Victoria/Sanich [email protected] your risk limits and are considering a high-risk Leslie Broatch White Rock [email protected] investment, ask yourself if you are investing, or NEW BRUNSWICK you are just being greedy? Bottom line: Don’t be John Richards Fredricton [email protected] a star or an extra in the next movie about greed. NOVA SCOTIA Bill Macgregor Halifax 902-717-8153 PEI Peter Peter Hodson Frank Driscoll Charlottetown 902-569-3601
4 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017
MoneySaver DIVIDEND& COMPANY NEWS In this column we list recent news, events, dividend income news and any other relevant information for MoneySavers. News items are those received after our last publication date.
• Surge Energy (SGY) to boost dividend by 15% • Noranda Income Fund (NIF) suspends dividends • Polaris Infrastructure (PIF) boosts dividend by 9%. • RDM Corp (RC) raises dividend by 25% and has • Toromont (TIH) boosts dividend by 6% received a $5.45 per share cash takeover offer • BCE (BCE) raises dividend 5% • CN Rail (CNR) boosts dividend by 10%. • Brookfield Renewable (BEP.UN) increases • Metro (MRU) boosts dividend by 16% distribution 5%. • Alqonquin (AQN) raised its dividend by 10% • Exco Tehnologies (XTC) raises dividend by 14% this week • Sandvine (SVC) boosts dividend by 14%
Canadian MoneySaver MODEL ETF PORTFOLIO
# OF % OF ETF SYMBOL CATEGORY PRICE UNITS TOTAL PORTFOLIO iShares 1-5 Year Laddered Corporate Bond CBO Fixed Income 18.95 506 9,588.70 7.6% iShares DEX Universe Bond XBB Fixed Income 31.00 166 5,146.00 4.1% iShares S&P/TSX Canadian Preferreds CPD Fixed Income 13.76 460 6,329.60 5.0% iShares S&P/TSX Capped Composite XIC Equity: Canada 24.40 980 23,912.00 19.0% iShares S&P/TSX Cdn. Div Aristocrats CDZ Equity: Canada Div. 26.59 562 14,943.58 11.8% iShares U.S. High Yield Bond Index ETF XHY Fixed Income 19.94 350 6,979.00 5.5% Vanguard FTSE Emerging Markets Index VEE Equity: Emerging 29.62 194 5,746.28 4.6% Vanguard FTSE Developed Europe All Cap VE Equity: Interntional 25.16 194 4,881.04 3.9% SPDR S&P 500 SPY Equity: U.S. 227.53 33 9,761.04 7.7% Vanguard Div. Appreciation Index VIG Equity: U.S. Div. 86.68 116 13,071.34 10.4% iShares Russell 2000 Growth IWO Equity: U.S. Growth 156.24 69 14,014.73 11.1% BMO Covered Call Utilities ZWU Equity: N.A. Div 13.75 437 6,008.75 4.8% Cash Cash Cash 5,789.10 4.6% Total Portfolio 126,171.16
Exchange Rate 1.30 $ Gain/(Loss): 26,171.16 Inception value: 100,000.00 % Gain/(Loss): 26.17% Inception date: October 18, 2013 % Annualized: 7.32% Prices are at market close on January 31, 2017. Individual prices are in USD$. Portfolio values, $Gain/(Loss), % Gain/(Loss), % Annualized all reflect USD$ values are converted to CAD$
CURRENT NOTES: None OTHER NOTES: Keep in mind all investors are different. This portfolio is designed as a guide in setting up your own personal portfolio. Unique considerations and adjustments need to be made to reflect your personal situation. Please perform your own due diligence before making investment decisions.
Please direct portfolio questions to [email protected]
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 5 More Money The Ultimate Guide To Robo Advisors - Part 2
Kyle Prevost
This is the second of a two-part series. Part 1 was published addressing precisely where your money is held and in the February 2017 edition of Canadian MoneySaver. why you are protected as a Canadian consumer. • The robo advisor model has been used around the Just How Safe Are world for several years now. For example, the American robo Betterment has been around since 2008, and now Robo Advisors Anyway?? has over $3 billion in assets under management. These guys are going to be around for the long haul, and they re robo advisors safe in the same way your are NOT “still working the kinks out”. These models Uncle Don had a “super safe” investment are tested and refined – and will continue to get better. in an Alpaca farm a few years ago? (You’re still getting your shareholder payments in • Every robo advisor that I’ve looked it is registered as shearedA wool each year, right?). No – they are as safe as a portfolio manager. This title means that they have pretty much any other bank or investment firm out there. fiduciary responsibility to their clients. This legal Here’s why I feel comfortable saying that: definition is key when it comes to making sure you get the best advice for your personal situation. • All robo advisors are a bit like storefronts. The “warehouse” or “back office” is a third party that is a member of the Canadian Investor Protection Fund (CIPF). If you’re not sure what the CIPF is, here What Is This Robot is what their website has to say: “Investment dealer Investing My Money In? insolvency doesn’t happen very often. In fact, since CPIF’s inception in 1969 there have been only 20 1. There is no robot investing your money. Member insolvencies. CIPF has paid claims and/or related expenses of $43 million, net of recoveries, and 2. There is a pre-agreed upon way to invest your no eligible customers have suffered a loss of property. money that you will choose and then a person, in tandem with a computer will carry out on • Even if the worst-case scenario was to occur and your behalf. bankruptcy ensued, robos’ clients’ money is kept Basically, all robo advisors have done is take the couch separately from the companies’ own balance sheet. potato investing theories that geeky personal finance Even before it got to that point however, it is likely writers like yours truly have been raving about for years another of Canada’s robo advisors or major financial – and make them much easier to invest in. Naturally, entities would buy a distressed robo company just to they won’t offer this service for free, so there is a relatively get their client accounts – thus moving your money small fee attached. to a new company or “storefront” but ultimately not losing a penny. Each robo advisor will offer this service a bit differently and charge a slightly different price to do it (more on • All the robos that I looked into are very transparent that in a second), but at their root, each robo seeks to and specific on their websites when it comes to take your investment dollars, learn about your goals, and
6 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 then recommend a basic index ETF portfolio that each of your investment dollars will be split into going forward. If Robo Advisors Are Such A Great Deal, Why Do You Still DIY? Each of the major robo advisors will make sure that some of your money is put into Canadian stock market After raving about what a good deal robo advisors are, ETFs, International stock market ETFs, and more you might do a double take when I say that I don’t plan conservative investments such as bonds and GICs. Each on using them. I will continue to invest using the DIY will do this in a unique way, but without getting too couch potato method that we’ve written about extensively nerdy on the details, what you really need to know is that on YoungandThrifty.ca. there is a ton of proof, science, and simplicity behind the financial management strategies that will be applied to That being said, I have now started recommending the your money. For what it’s worth, I endorse this approach robo advisor route for 80% or so of my friends. wholeheartedly. Why is it good enough for my friends but not for me? It’s all a matter of value and eliminating obstacles that get in the way of consistently turning part of your bi-weekly Why Are Robo Advisors or monthly cheque into an investment portfolio. Such A Good Deal? Anyone can build the exact same investing portfolio When compared to the way most Canadians still for themselves that they can get through a robo advisor – most of the robos even go so far as to show you the choose to manage their money, robo advisors are a exact portfolio options available on their website or fantastic deal. What it really comes down to is how much during the first consultation you have with them! There of your investments are you willing to sacrifice each year is very little that is new or original when it comes to the in return for financial advice and help getting money investing side of the robo advisor operation. One thing from your paycheque and into an investing portfolio? that I really admire about all the major robo advisors in Robo advisors each have their own way of charging for Canada is that they have been entirely up-front with me their services. Some charge a flat rate, while others charge in admitting that you can implement a DIY index ETF a certain percentage, and a couple charge a combination portfolio for significantly cheaper than what it will cost of the two. What all the robos have in common is that you to do something similar through them. Personally, I they are simply a much cheaper way to invest than the feel very comfortable setting up my own online discount traditional bank mutual funds. The larger your nest egg brokerage account and managing my portfolio (and it grows the truer this is. looks pretty much identical to the ones that would be recommended to me through the robo advising services). I personally believe that both younger and older I’m kind of a nerd and not exactly the target audience Canadians who are comfortable in an online-only for these companies. environment will find the robo advisor platforms much So, to recap so far, DIY index investing is cheaper than easier to interact with than those of the big banks and using a robo advisor. I still maintain that I don’t think it investment companies. That is their sole purpose after is overly difficult to DIY using a basic portfolio of index all. I cannot emphasize enough how intuitive and ETFs. I would compare the overall difficulty level to aesthetically pleasing the leading robo advisors’ websites grade 9/10 math. are. I think it’s likely that big banks will soon follow BMO’s lead and put forward their own robo advising options that copy the best parts of what’s out there (or buy out some of the current leaders). Is DIY Or A Robo A Better Fit
Overall, because I prefer the flexibility of working For You? with an online platform as opposed to face-to-face talks, Ultimately, how I choose to manage my investments I would actually pay more for an online-only model. The probably doesn’t matter much to you – what should fact that my money is invested much more effectively than matter is which options will get you the best results going using big-bank mutual fund fees, and I see a major cut on forward. Here’s a few quick questions to help you decide fees, means that this isn’t even a close comparison for me. how to invest your money (assuming you have come to
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 7 the same conclusions that I have and determined stock investing easier is worth A LOT of value to the majority picking is probably not your cup of tea and that mutual of Canadians. Sure, it will probably cost you somewhere funds are generally a terrible idea). around 0.5% to 0.7% of your portfolio annually, but if it makes the difference between you investing $5,000, and 1. Do you want to do your own Gr.9/10 math? not getting started at all, that is a very minor concern. Please don’t answer this question based on Plus, don’t forget that you’re still way ahead of traditional pride. Seriously ask yourself if you want to make financial advice/investing models. this commitment 4-12 times a year when you rebalance your investing portfolio. If you don’t, If there’s a one thing I’ve learned while trying to talk then go with a robo. (I’m fine with Gr. 9/10 math, to Canadians about money over the last few years, it’s but don’t ask me to do elementary-level lessons in that most of us don’t really want to manage their own learning any foreign language.) investments. We want to “set it and forget it” and then re-visit the idea again a few years before we retire. This 2. Do you want to do a few hours of reading and is why workplace pensions are so sought after. I’ve also paperwork to fully understand index investing noticed that many Canadians get a burst of energy, read a and how to implement it? If you don’t, then go bunch of stuff, and then fail to follow through and execute with a robo. the investing strategy they’ve read so much about. Or they 3. If a strategy is easier for you, will it make a large get bogged down in stuff like specific ETF choices and difference in how successfully you implement and then they start thinking that maybe picking a few stocks stick with it? Think about going to the gym. If isn’t such a bad idea, etc. For this majority of Canadians, your gym was 15 minutes closer to your house, the robo advisor model is a perfect fit. would you be slightly more likely or much more If you want to see our comparison of Canada’s robo likely to use it? If convenience and ease of use are advisors and take advantage of some exclusive discounts, major factors for you, then go with a robo. head to: http://youngandthrifty.ca/complete-guide-to- 4. If you’re just not super confident when it comes canadas-robo-advisors/. to investing terms such as ETF, RRSP, TFSA, etc., and think it would be really nice to have someone to email or chat online with from time to time, then go with a robo. Kyle Prevost is a business teacher and personal finance writer helping people save and invest over at MyUniversityMoney. Each of these four questions might seem sort of “small com and YoungandThrifty.ca. His co-authored book, More potatoes” to you, but truthfully, they’re not. Making Money for Beer and Textbooks, is available in book stores.
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8 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Legal And Big Picture Planning Using A Discretionary Family Trust To Income Split Your Investment Portfolio With Spouses And Children Of Any Age
LINDA MACKIE PHOTOGRAPHY Colin Ritchie
commonly hear the same refrain from family, can save the day. (As an aside, if you’re just interested in friends and clients: it costs a lot to raise children income-spitting with your spouse, your solution may be these days. There is a seemingly endless list of even simpler, as you probably won’t need a trust, only an activities to fund, pieces of equipment to buy, investment loan in favour of your spouse (per the rules medicalI expenses to cover, and educational payments, provided later in this article). In any event, in order to such as private school tuition, to pony up. Many of my tap into the whole family’s tax returns and make a trip to friends feel like glorified ATMs that also have carpooling Disney World next year that much more affordable, it is duties and high cholesterol levels. Although it may not necessary to do as follows: set up a trust controlled by one always be possible to reduce these expenses directly, it may or both parents that borrows money from the high-income be possible to make them more affordable in another way: parent at the prescribed government rate, invest the money through income tax savings. Although this article won’t inside the trust, and then allocate the income and gains help with the carpooling or cholesterol, it might at least among the various family members named as beneficiaries guarantee that there is more money to pull out of the any way you want. Provided all the formalities are obeyed ATM on your way to drop your children at oboe lessons (such as ensuring that the lending spouse is paid and or to pick them up from hockey practice. declares loan interest each year), a whole new world of tax savings (and quality time with the Mouseketeers) awaits! The Income Tax Act has clear rules about income splitting among spouses and minor children: any income is How it Works attributed back to the contributing spouse or parent, as are all capital gains on money gifted to your spouse (although In basic terms, a trust is a legal relationship whereby at least gains on money gifted to minors can be taxed in one person (the “settlor”) gives property to another person the minor’s name). Of course, as anyone who funds an (the “trustee”) to manage for the benefit of others (the “in trust” investment account for minor children should “beneficiaries”). As well, sometimes, there is someone know, once the child child becomes an adult, the money is else in charge of keeping an eye on the trustee and theirs to use without restriction. Accordingly, even though potentially picking replacement trustees (the “protector” it is possible to set up an “in trust” investment account for or “appointer”). a minor designed to produce only capital gains in order to Under Canadian tax rules, it is usually required to have save on taxes now, many parents and grandparents simply someone other than mom and dad as the settlor. Instead, don’t feel comfortable losing control over the amount of money needed to make this strategy really worthwhile. mom and dad would be both trustees and beneficiaries While the rules aren’t as tight when gifting money to adult which effectively allows them to control the money now children — although income can still be attributed back to and potentially take it back later. As for the settlor, it is the gifting parent if the Canada Revenue Agency (CRA) usually a family friend who owes you big-time, or another believes the gift was for incoming-splitting purposes — the relative who won’t be included as a beneficiary. The settlor’s same concern about giving too much money to people only role in this case is essentially to be a figurehead — not ready to manage it still prevails. he or she merely provides a silver coin or ingot and signs the document creating the trust, then fades into the For those of you gripped with a crushing despair after sunset. The trust is drafted according to mom and dad’s perusing the last paragraph, all hope is not lost: a properly instructions and names themselves, their children and constructed family trust, along with an investment loan, potentially other lower-income family members (such as
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 9 potentially their parents) as beneficiaries. It also usually so, and the trustee decides how to divide the remainder gives the trustee complete discretion each year to decide among the beneficiaries. how any income or capital gains earned inside the trust are to be distributed among the beneficiaries. In other words, There could be a significant capital gains tax bill at that it is the trustee, not the settlor, who really controls the time, although the gains may be allocated to low-income trust, and he can decide exactly who (including himself) beneficiaries provided there is enough additional money gets how much each year, with an eye to getting the best left to repay the loan. Noting that this day of reckoning tax results and ensuring the best use of the money. may come, some trustees start periodically realizing the gains many years prior to the 21st anniversary or the Now that trust is in place, it’s time to get down to planned windup date of the trust, allocating them to the business of investing. The parent in the highest tax beneficiaries in low tax brackets along the way. This can bracket then lends the trust money at the prescribed ensure that the tax issues at the time of the 21st anniversary government rate — currently 1% per year and which can or windup are a non-event. In fact, if there isn’t going to be locked in for the life of the loan. It is vital that the loan be a big tax bill at that time, the parents may decide to be documented, that each year’s interest be paid to the keep the trust operating, such as if there are still tax savings lending spouse prior to January 30 of the next year, and to be had. In fact, in some cases, mom and dad are now that the lending spouse declares this as interest income on grandparents and may want to help their children with his tax return; one missed year is enough to disqualify the the grandchildren’s costs in a tax-efficient way by using the trust from any future income splitting. Instead, it would trust to pay these expenses. If there are any assets in the lead to the income being taxed in the hands of — and at trust with unrealized gains that haven’t been liquidated, the rates of — the spouse we were trying to get it out of the trustee can transfer them to any of the beneficiaries in the first place! without triggering tax at any time prior to the next 21st anniversary of the trust’s creation, so that person would Provided the i’s get dotted and t’s get crossed, the now own such assets with the same cost and unrealized trustees can now allocate any of the income and capital capital gain as was the case when owned by the trust. gains earned on the trust’s investments as they desire each year among the various beneficiaries, effectively taxing it Additional Steps To Get And Keep The Trust at the latter’s rates. When allocating the money to minors, Up And Running however, mom and dad as trustees can then turn around Other than handling the investment portfolio directly and pay it to themselves in their other role as the legal or consulting with the person hired to do this for the guardians of their children. They are required, however, trust, the trustee has other administrative tasks to attend to spend the money for that beneficiary’s benefit, and it to from time to time. Your lawyer and accountant can is important to keep a clear record, including receipts, of help the trustee with these — particularly for the first where the money goes. If not all of the money allocated year or so, after which you may be more comfortable to a beneficiary is going to be used that year, the trust can doing more of this on your own. Usually, the first order write that beneficiary a demand promissory note prior of business will be applying for a trust number from the to year-end and keep the money in the trust without CRA, as many investment institutions and banks won’t causing problems. Since the beneficiary is now entitled allow you to open an account for the trust until this has to immediate payment of the money upon demand, been done. This may take several months, so it generally however, some parents may be reluctant to run up too makes sense to delay selling assets and loaning money to large an “IOU” to the child who, when he becomes an the trust until the number has arrived and the relevant adult, can demand immediate payment of the balance accounts are ready to go. owing at that time. The trustees will also need to keep clear records and Mom and dad can theoretically continue to operate the receipts of the trust’s activities, expenses and payouts. trust for decades, although these types of trusts are often Generally, most trustee decisions are documented wound up far sooner — such as when the lender spouse through “Trustee Resolutions” that are usually rather dies or when the children are finished university and are brief documents signed by the trustees. Perhaps the most no longer in a low tax bracket. Moreover, every 21 years, common is an annual resolution each December declaring any unrealized capital gains on assets owned by the trust how any income or capital is to be allocated among the are taxed, which leads to many trusts being wrapped up beneficiaries that year (by dollar amounts or percentages at this point if the bill is going to be a large one. When of income received, depending on what makes the most the trustee wishes to wind up the trust, the trust repays sense at that time). The trustees will also need to prepare the loan by liquidating enough of the investments to do new loan documents and additional directors’ resolutions
10 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 if mom or dad ever decides to loan the trust additional larger portfolios, the real savings may be achieved through money in the future. allocating dividend income to those in the family with lower incomes. The trustee will also need to work with a tax preparer to file a return for the trust showing the realized capital Let’s assume that John and Jane spend $20,000 per year gains and earned income, although most trusts seldom on their son Michael’s education and activities, that Jane have to pay any taxes directly, since it is more tax efficient is a stay-at-home spouse, and that John is in the highest to have the income taxed in beneficiaries’ hands most of tax bracket. John receives an inheritance of $400,000 the time. All of the beneficiaries will have to report taxable from his mother and would have invested it in blue chip income received by the trust on their own returns. For stocks that pay 5% per year in dividends ($20,000). If minor beneficiaries receiving no other income, it might be taxed in his own name, he would owe $6,260 in taxes on the difference between them having to file a return or not. the dividends. By using a trust instead, he would report $4,000 in interest (1% of $400,000), on which he would Finally, the trustee must account to the beneficiaries pay $1,908 in taxes. After paying the interest expense, the from time to time about how the trust is operated. trust would be able to allocate the remaining $16,000 to This essentially requires showing the trust’s income and Michael and use this money toward his expenses. Since expenses. This should be done within the first two years of Michael isn’t earning any other income, this money will the trust’s existence, and then more sporadically thereafter. be tax-free. As a result, the family saves $4,352 each year It’s been suggested that this be done every three to five even if the dividend payments don’t increase and the years. If a beneficiary disputes the charges, he can get the trustee to do a formal passing of accounts before a court investments don’t grow in value. If there are any future officer (although this is extremely uncommon in the case gains, the savings are even higher since any capital gains of trusts set up for this purpose). can be reported on either Jane or Michael’s returns, and thus taxed at their rates, rather than John’s. Tax Savings And An Example Conclusion Since I’m B.C.-based, this example uses the tax rates that apply to most of my clients, although the potential Although there is definitely a hassle factor involved in tax savings can be a lot higher in most other provinces, setting up and maintaining a family trust — as well as a where the highest tax brackets are higher than those on legal bill of probably $3,000 or so — the potential yearly the “left coast.” As well, B.C. is one of the provinces that savings may be too much to ignore, particularly since the offers a higher dividend tax credit, meaning that taxpayers annual costs of running the trust will be far lower than in some other provinces potentially lose twice — once the set-up fees. Accordingly, if you have a significant non- through higher tax brackets and a second time through a registered portfolio, and either children or grandchildren lower enhanced dividend tax credit that effectively means that you want to help financially in lower tax brackets, a higher tax rate on dividend income. For example, in it may be worth sitting down with your accountant and B.C., the highest tax bracket is 47.7% and the effective lawyer with a calculator and your investment portfolio tax rate when earning dividends in this tax bracket is to see if this might work for you. For those of you doing 31.3%, whereas Ontarians earning more than $220,000 leveraged investing who don’t mind the risk, using the pay income tax at 53.53% and are taxed at 39.34% on trust for the leveraged portfolio may make your money enhanced dividends, including all surcharges. go further, although this strategy would probably mean lending the trust money at your own borrowing rate rather Also, dollar for dollar, the most potential savings apply than the lower prescribed government rate. This would when transferring interest from the wealthy parent to a starving child, at least until the child is earning enough mean that the interest paid to you by the trust would now money to actually pay tax on any of it. On the other cancel out your own borrowing costs for tax purposes and hand, using investments with eligible dividends instead would also provide a higher tax deduction to the trust as of interest income can save clients with larger portfolios well. In any event, the next step is to crunch the numbers. more money in total. For example, while a child in B.C. One day, your family and the companies owning family can earn over $10,000 in interest tax-free if that is his vacation resorts the world over may thank you! only source of income, he can actually make more than $50,000 solely in dividend income tax-free. The same Colin S. Ritchie, BA.H. LL.B., CFP, CLU, TEP and FMA generally holds true in other provinces, although someone is a Vancouver-based fee-for-service lawyer and financial earning only dividends may not be able to earn quite as planner who does not sell investment or insurance, just advice. much tax-free as a British Columbian. Accordingly, for To find out more, visit his website at www.colinsritchie.com.
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 11 Rate Resets Are Back.... With A New Look New Rate Reset Preferred Shares With Floor Feature Are They Worth A Look?
Stephane Ruah
or the past year, new preferred share issuances same rate five years later, get paid back, or renew at a were somewhat rare, until November when higher rate if Canada five year rates go higher. three major underwritings took place. Brookfield Asset Management, TransCanada The retail investor has been hit with severe losses as andF Enbridge all raised money in the same week and while this was one of the worst performing sectors over the similar to the old rate reset preferred shares, (with an initial past year because rates went down and issuances were so rate for five years and a new rate reset in five years equal to frequent that the supply crushed the demand. Canada five-year bonds + (indicated rate specific to each At first glance this new type of preferred share looks issue) this time they added an additional important feature, good but from experience I suspect many more companies a new FLOOR rate, equal to the original rate. will be issuing more shares to the market soon enough These offerings were very well received by the public, and this could cause some pressure on the overall sector and the three deals were upsized and are now trading at once again. Investors looking for income and capital a significant premium to the issue price. preservation must remember that preferred shares are For example, the prospectus for the new Brookfield NOT considered fixed income and bonds would still be Asset Management Preferred Share issued on November the most reliable option. 10th 2016 reads: Please do not hesitate to contact me if you would like • The Annual Fixed Dividend Rate will be equal to discuss this further. You can also email us to sign on to the greater of: (i) the Five-Year Government to our newsletter. of Canada Bond Yield (“GCAN5YR”) plus 3.85% as quoted on Bloomberg (see quote Stephane Ruah is an Investment Advisor at iA Securities. for “GCAN5YR
12 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Portfolio Management Small Business Owners And Professionals Have You Got Your Money Working For You?
Allan Small
f you’re a small business owner or a professional that settlement delay of two to three days to access the funds, has incorporated, do you have surplus cash sitting but for most corporate investors that is acceptable. in your corporate account earning next to nothing? Why not put that money to work by investing it, The corporation will have to pay tax on the additional to Iproduce an additional revenue stream? earnings, but corporate tax often is less than personal tax, which makes for a winning proposition. It’s surprising how many small business owners and professionals don’t realize that their corporation can invest Here Are Some Tips To Consider their surplus cash. They often assume that they need to Related To Corporate Investing: pull money out of their small business in order to invest it, which is then taxed, and then they invest the money Have A Goal In Mind personally. Many obviously don’t want to pay the extra tax and, consequently, just leave the money sitting in a Like any one or organization that is investing, it’s corporate account, which offers little in the way of return. important to understand what you want to achieve as this can often impact the type of investments that will Liquidity Is Important For be considered. Small Businesses When Determine How Much You Want To Invest It Comes To Investing Businesses need to think carefully about how much they Investing is a viable option to bring in additional want to invest. It’s important to take into consideration revenue. Perhaps the biggest difference in the approach to cash flow and debt obligations. Like personal investing, investing by a business compared to an individual investor your investment advisor also will ask about your risk is the need for liquidity. Unlike most personal investors tolerance and your time horizon. Understanding the time who tend to be investing for the long term (10, 20 or 30 horizon is important because businesses tend to be more years out in the future), small businesses need to be able cautious and have liquidity considerations. to access their money on a regular basis. Types Of investments
Businesses often have a need for the money much Pay attention to the type of investments selected sooner, perhaps to cover expenses if some receivables are because of liquidity concerns (e.g., don’t invest in five- late coming in, or there may be a desire to reinvest into year non-redeemable GICs). Companies might want to the business to purchase equipment or even leverage the look at investments that can be liquidated quickly, such funds to make an acquisition. as low-risk corporate bonds or dividend paying stocks. Surplus cash sitting in a corporate account will make Understand the tax implications next to nothing, but, if invested, the hard-earned money could earn a rate of return that is much better than money Talk to your tax advisor before moving forward to just sitting in cash or in a savings account. It is possible ensure that you understand the implications for your to invest and keep the money liquid. There may be a situation. They can provide counsel on the best way to
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 13 access the additional funds from the investments in the This article was prepared solely by Allan Small, registered most tax-efficient way possible. representative of HollisWealth ® (a division of Scotia Capital Inc., a Allan Small is the Senior Investment Advisor with Allan member of the Canadian Investor Protection Fund and the Investment Small Financial Group with HollisWealth, a Division of Industry Regulatory Organization of Canada). The views, including recommendations expressed in this article are those of Allan Small Scotia Capital Inc. (www.allansmall.com) as well as the and not those of HollisWealth. ® Registered Trademark of The Bank author of How To Profit When Investors Are Scared. He of Nova Scotia, used under license. Allan Small Financial Group is a can be reached at (416) 332-3863 or via email at allan@ personal trade name of Allan Small. allansmall.com.
MoneyTip
The Pros And Cons Of Inverse ETFs
Inverse ETFs are exchange-traded funds that rise in value which requires a margin account (ie. investing with when the index that they track falls in value. If you borrowed money) or using options strategies, which can believe the markets are going down, you can buy shares be pretty complicated for the average investor. in an inverse ETF just like an individual stock. If you’re right, your shares will rise in value. But if the market rises, Here are a few reasons inverse ETFs might not be for you: the share price of your inverse ETF will fall. As with any other investment, you can lose money if Inverse ETFs are a relatively new product, particularly you’re wrong. for Canadian investors. As a result, they may have very Inverse ETFs, especially the leveraged ones, do not always low volume and limited chart records for you technicians track the underlying index very closely over long periods out there. One of the more popular inverse products is of time. For this reason, inverse ETFs are not a good long- (HIX). This ticker is for the Horizons Beta Pro S&P/TSX 60 term hold and should only be used as short-term trading Inverse ETF. This is a single inverse ETF that gives you 1x (or speculative) tools. the daily movement of the TSX 60 Index. So if the TSX 60 is up 1% on the day, HIX will be down roughly 1% on the Inverse ETFs, like regular ETFs, involve trading day, and vice versa. commissions. You will pay your broker a fee each time you buy or sell shares. If you’re using a discount broker, Here are a few reasons you might want to incorporate this might be as low as $4.95 per transaction, but it’s inverse ETFs into your overall investment strategy: something to factor into your decision. You can make money in a down market: Markets move in Inverse ETFs have higher MERs (Management Expense both directions. Why be a slave to the upside? Ratios) than their regular counterparts. For example, you You can use inverse ETFs to hedge your portfolio: If you can go long the S&P/TSX 60 via the XIU (iShares S&P/ see a big dip in the markets on the horizon, but you want TSX 60 Index Fund) for a management fee of just 0.17%. to keep some of your core long positions, you can mitigate Going effectively short the TSX 60 via the HIX, however, some of the losses on your longs with gains from your will involve a management fee of 1.15%. Those fees are inverse ETFs. In this sense, these effective short positions already included in the price of the ETF, and account can act as a sort of portfolio insurance. For some people, for some of the discrepancy between the ETF and the this might make it less likely that they will panic out of underlying index. core long positions.
Inverse ETFs are a lot easier to use than other methods Source: Canadian Finance Blog that allow you to profit from a down market like shorting, “The Pros and Cons of Inverse ETFs”, Kim Petch
14 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Advisor Advice Exchange Traded Funds Versus Individual Stocks – Which Is Better?
Peter McMurtry
hen Exchange Traded Funds ( ETFs) rap for being too risky for many investors. However, first were introduced they were as long as one is sufficiently diversified across all eleven compared very favourably to mutual equity sectors, combined with spreading the risk by funds. Much lower management investing in both value, growth, small, large cap and fees,W no deferred sales charges, better performance, more international companies, stock investing can produce strategic tax efficiency were factors that investors needed superior returns and lower risk than many ETFs. to make the switch out of mutual funds.. Furthermore, analyzing individual Today there are so many types Good fundamental companies is much easier than of ETFs that many investors really attempting to do research on ETFs. do not understand what they are stock selection on Lack of transparency, limited invested in and how much risk these disclosure of material factors and a investments incorporate. short historical track record make individual companies ETF investing much riskier than a The basic principle of mutual funds disciplined investment of individual and ETFs is risk reduction through produces a factor stocks. Basic fundamental stock diversification. The influx of sector analysis is just not possible with ETFs. and active ETFs both on the long and called alpha that is In most cases the security regulators short side of the market has materially only require the top ten holdings to added a level of risk that was not the the unique advantage be reported and this is simply not case for passive index ETFs of the sufficient to accurately determine the overall major market indices. that one company has level of risk assumed. Secondly, the holdings can change frequently and New ETFs are being created every over its peers. this makes the investment analysis day that supposedly satisfy a client’s even more difficult. needs for equity participation in sectors of the market such as biotech, Alpha is defined as the excess pot stocks, country specific emerging markets and cyber returns created by investing in companies that beat security. The list is endless and expanding continuously. their benchmark indices. This is the factor that the best money managers such as Peter Lynch, John Templeton Despite the benefits of these trends, the traditional and Warren Buffet use to create their superior long term advantage of risk reduction from market diversification performance. An investment in an ETF largely ignores or is being overshadowed by the sharp increase in unique greatly diminishes the benefits of alpha, although there risk. This risk is not being adequately conveyed to retail are some active ETFs with this goal in mind. investors by the creators of ETFs who are principally driven by increasing their revenues at the expense of Frequently during my thirty years in this money everything else. management business, I have heard many retail client advisers belittle the benefits of stock picking. Clients Individual stock investing has unfairly received a bad deserve better. The decision to invest in an ETF that may
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 15 hold a small investment in a superior stock will almost Investing in individual stocks is one investment always water down the benefits of investing directly in approach we cannot afford to ignore. that stock. Retail clients think they are getting superior stock picking from their adviser, but in many cases this is clearly not the case. Peter McMurtry, B.Com, CFA, Financial Writer Monthly Strategies for Do It Yourself Investors In conclusion, many retail investors are branching https://mcmurtryinvestmentreport.ca away from their investment advisers in order to improve [email protected] their performance, lower their fees and lower their risk.
MoneyTip
Jack Bogle Tells You The Secret To Becoming A Winning Investor
Talk to Jack Bogle long enough and you get the idea On smart-beta and “factor” investing built around that he never gets the answer wrong — he simply tells “new and improved” indexes: the right answer to come back when it’s ready for him. Bogle: I happened to create the first two — and still On the index he would pick if he was starting the first the largest two — strategic beta funds in the entire index fund again: mutual fund industry, that is the [Vanguard S&P 500] Bogle: I would choose the Standard & Poor’s 500 Stock Growth and [Vanguard S&P 500] Value … but I did it Index SPX, +0.04% for the same reasons I picked it in for not the same reasons we see for factor investing the first place all those years ago. The reality is that it’s today. I did it because I thought investors could weighted by the market capitalization of each stock, so accumulate money with a little extra risk and a little if a big stock goes up in value, you don’t have to buy any more tax efficiency in the growth portfolio, and when more, it goes up in value by the exact same amount in they retired they would stick to the value portfolio and the fund. It is a very low-transaction costs investment. have a little lower risk and a higher income. It made a It’s the best index around. lot of sense to me. On people who would criticize that choice because the In the early reports, I said, ‘Now, look, don’t switch S&P 500 is a U.S. stock index: between these funds back and forth. In the long run, they are apt to do the same, so it’s just a question of Bogle: I’m out on kind of a limb on this, but I realize — how you get your return, heavily on income or heavily and everyone else should know — that in the S&P 500, on growth. And nobody listened to me … The prediction almost half of the revenues and half of the earnings of was right; both the growth and value funds since then those 500 corporations come from outside the U.S. It is have had an identical return of 9% per year, separately. an international portfolio, it just doesn’t have a stock For investors who traded back and forth, the investors price that floats in the international market. earned a return of less than 5%, because they switched So I am happy to have a totally U.S. portfolio, and that back and forth, they have changed the performance. is what I happen to do myself. I can’t tell you it’s right. Two good funds, but badly used, and I think everyone I can’t say that international won’t do better in the in the mutual fund business when they bring out some future, because it has done so much worse in the past flashy new idea should think not about how it will since I first made this statement back in ’93. … You enrich them as marketers, but whether it really serves don’t need to use international, however, and if you do, the interest of investors. keep it below 20% of your portfolio. Source: MarketWatch “Jack Bogle tells you the secret to becoming a winning investor”, Chuck Jaffe
16 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 DIY Investing Top Five Investing Myths
Theodor Tonca
ome of the more traditional ways of small armies of analysts compile and churn out elaborate investing for both capital preservation and spreadsheets filled with a plethora of mind-numbing compounding purposes, such as purchasing a statistics and forecasts. local family business or buying into a far larger enterpriseS by way of a public stock exchange to provide a Hence it should come as no surprise that the vast continuous stream of income for years or even decades to majority of actively managed investment funds trail the come, have unfortunately — to the detriment of investors market index's year after year.* everywhere — not been perpetuated to quite the same Take a moment and think about the information you extent as some of the more fabled stories presented below. would need to make an informed, intelligent decision in order to purchase into an already operating business. First Accurately Forecasting The Future and foremost, it should probably be something within Is Necessary In Order To Be your existing wheelhouse that you intimately understand, Successful such as a business located in your neighborhood. Secondly, you would want as much information about Who would have guessed that a domain typically it as possible, up to date financial statements, ownership reserved throughout the ages for self-proclaimed seers, structure, and lastly, you would want good, quality people mystics, psychics, and other colorful characters would involved in running its operations. come to be prized by a profession which likes to pride itself on rationality and objectivity. Now simply take this and apply it to your research and analysis of public companies — many of which first Our modern-day equivalent of such ancient started out as small, local businesses. fortune tellers are economists, of whom even the most distinguished are accurate no more than once on average The Stock Market Is There over the span of an entire career. Yet surprisingly (or To Guide Us perhaps not so much) such personages continue to be highly sought after by financial institutions for their Tuning out, rather than into others’ opinions, stock opinions and are regularly quoted in the popular media. charts, and signals is beneficial to your long-term financial and overall well-being. Highly Complex Algebra Benjamin Graham accurately lamented that the market Is Needed To Determine as we know it, exists but for one single purpose, and that is A Business's Underlying Value to serve us as investors rather than guide us. By providing us with recurring opportunities every now and again to To quote Albert Einstein, “Any fool can make things purchase into businesses when prices are low and to sell bigger, more complex, and more violent. It takes a when prices become dangerously high. touch of genius and a lot of courage to move in the opposite direction.” Despite such far-sighted wisdom Unfortunately, over 600 years of exchange or “bourse”, most investment funds today continue to have their history* has shown that people tend to do just the
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 17 opposite, that is buy when prices are prohibitively high and sell when they are low. Tax Update Corrections Volatility Equals Risk
Since I do not intend for this to be an academic Dear Readers, dissertation, I will simplify this section by saying that there It is with considerable embarrassment and is a widely ascribed to thesis going by the inauspicious regret that I report on two errors made in name of Modern Portfolio Theory. This academic theory my January Article, Update of Income Tax states that to reduce day to day fluctuations within your Savings. The first error was my following investment portfolio, which are deemed bad and risky, Trudeau’s pledge to rescue our middle class an investor should simply add un-correlated assets to by giving them a 1.5% reduction in their the portfolio such as stocks, bonds, real estate, etc. until 2016 Income Tax. Like perhaps many other 'proper' diversification is achieved. readers I believed everyone with a taxable Of course, such an assertion to an enterprising investor income between $45,282 and $90,563 would is sheer fool-hardy, since if you are able to understand a get this 1.5% reduction on their income. That few businesses, their underlying economics, and are able is not the case. Alerted by Brian Quinlan’s to purchase into them at reasonable prices, conventional article I found that that everyone in this tax diversification beyond a small basket of five to ten bracket gets the same $679 reduction [1.5% names makes no sense whatsoever. After all, what is the of $45,282]. likelihood of anyone's 20th best idea being as good their The other error was not carefully proof reading first? the article’s graph showing the big change in the tax on Canadian dividends in the last few The Stock Market Is Efficient years. Two important descriptions of what the graph depicted were missing on the pre- Eugene Fama's Efficient Market Hypothesis (EMH) edition copy I was encouraged to check over. states that asset prices fully reflect all available information Capital Gains was missing over the top line in and as thus accurately represent the true underlying value the graph. And At $90,000 Taxable Income of any given business. was missing over the lower half of the chart. At the end of the day, markets are nothing more than In brief, the illustration of over twice the tax an aggregate of all individuals within a society as Friedrich on Capital Gains at $50,000 income as the tax Hayek established in his 1945 paper, The Use of Knowledge on Canadian dividends { 14.83% vs 6.39%] in Society. Therefore, a market can be no more accurate was confusing. Hence, the point of selecting or rational than we are, which, when we take into full investments to use this knowledge to put a consideration our inherent emotions as human beings pile more money in your pocket was lost. such as fear, greed, and envy among a pallet of others, is I am sincerely sorry about the confusion my not very rational at all. chart created and I appreciate very much that many of you contacted me to point this Keeping this in mind, we know that price is what out. we pay, but value which is what we get is another thing entirely. Hedley Dimock [email protected] Theodor Tonca is Chairman & CEO of Graham Theodor & Co. Ltd. A privately-held merchant banking firm originally founded in 2007.
18 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Sector Focus Let's Go To The Store: Three Canadian Retailers Investors Can Count On
Richard Morrison
Couche-Tard, Dollarama Scandinavia, Ireland, Poland, the Baltics and Russia and 13 other countries under names such as Circle K, Couche- And Canadian Tire Still Tard, Mac's, Kangaroo Express, Statoil, Ingo, Topaz and Attract Customers As Re.Store. Many of its locations combine a convenience Department Stores Suffer store with a fast-food restaurant, while others are simply unmanned automated fuel stations.
Founder Alain Bouchard founded the company with t came as no surprise that brick-and-mortar a single convenience store in Laval, Que. in 1980, then department stores reported dismal sales this began expanding through acquisitions to 34 stores by Christmas season as every year, more shoppers 1986, 115 by 1987, 304 by 1995 and 1,625 by 2000. stay home and place their gift orders online. Further acquisitions brought it to today’s total, but unlike TheI trend is gloomy for department store shareholders, many companies that borrow heavily and pay hefty prices but a welcome one for shareholders of online retail giant to swallow smaller rivals, Couche-Tard’s managers have Amazon.com (AMZN/NASDAQ) and investors who shrewdly walked away from expensive or questionable own stock in couriers such as FedEx Corp. (FDX/NYSE), deals. and United Parcel Service Inc.(UPS/NYSE). In fiscal 2016, Couche-Tard announced its eighth But not every brick-and-mortar retailer is suffering. straight year of record earnings, reporting net earnings of Here is a quick look at three large, established Canadian US$1.194-billion, up 28.4% over fiscal 2015. Excluding retail store chains whose growing sales and profits have non-recurring items, net earnings were $1.188-billion, up demonstrated resilience in the face of increased online 16.7% over the previous year. The company’s return on shopping. Their shares are suitable for most investors, equity (ROE) reached an impressive 27% in fiscal 2016. depending on their investing style. Disclosure: neither I nor anyone in my family own shares in any of the three. Couche-Tard shares have had a huge run-up over the past five years, climbing 500% to more than $60 from Alimentation Couche-Tard the $10 level they traded at in early 2012. An investor (ADT.B/TSX) who put $1,000 into Couche-Tard when the shares were less than $1 in September of 1999 and reinvested the No matter what they order online, motorists still dividends would now have more than $88,000, for an have to refuel their cars at gas stations and those average annual compound return of 29%, figures from looking for bread, milk, cigarettes, lottery tickets and longrundata.com show. other consumables are unlikely to order them via their computers. This means gas bar and convenience store At a recent share price of about $60, the stock trades operator Alimentation Couche-Tard is nicely insulated at a high 23 times earnings and 5.1 times book value per from the trend that’s hurting department stores. share, but the sales per share ratio is just 0.78%. Couche- Tard has regularly increased its dividend, most recently to Couche-Tard has a network of more than 12,000 36 cents per share (9 cents per quarter), yet the dividend owned and leased sites operating across Canada, the U.S., still yields just 0.6%.
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 19 Despite its impressive long-term growth record, the since their first listing. A shareholder who put $1,000 0.6% dividend yield makes the shares unsuitable for into Dollarama when it went public and reinvested income seekers, and the fact it’s share price has been the dividends would have more than $10,500 today, essentially flat for the past year and a half means it is representing an annual compound growth rate of 38.5%, suitable only for patient investors seeking long-term figures from longrundata.com show. growth. Dollarama Inc. has been a superb investment, but the Dollarama Inc. (DOL/TSX) company’s shares are expensive, trading at about $100. At that price, the stock trades at more than 28 times earnings, Just as Couche-Tard’s consumables are unlikely to be nearly 26 times book value per share and 4.33 times sales bought online, the inexpensive items on Dollarama’s store per share. The 40c per year dividend yields just 0.4%, shelves are not something consumers think of ordering which means investors who buy Dollarama at this price from Amazon. Dollarama has 1,069 corporate-owned are betting on continued growth. Dollarama is suitable stores where shoppers go for low-priced kitchen utensils, only for momentum investors -- those who buy high in plastic cutlery and plates, placemats, stationery, school hopes of selling higher. and craft supplies, cleaning products, shampoo, soap, balloons, gift wrap, toys, storage bins baskets and other Canadian Tire Corp. (CTC.A/TSX) items priced below $4. Canadian Tire, like Tim Horton’s, has become a Like Couche-Tard, Dollarama has risen from humble national icon. In 1922, brothers John and Alfred Billes beginnings and is now under the control of the fourth pooled their $1,800 in savings to buy Hamilton Tire & generation of Rossys. In 1910, Salim Rossy emigrated to Garage Ltd. at the corner of Gerard and Hamilton streets Montreal from Lebanon and opened department store S. in Toronto. The next year they sold the business and Rossy Ltd. Salim’s son George took over in 1937 and led opened a new store and Yonge and Gould streets under the retailer until his death in 1973, when his son Larry the name Canadian Tire Corp. “because it sounded big,” took over what was then a chain of 20 stores. Larry opened Alfred later admitted. They issued their first catalogue the first Dollarama in Matane, Que. in 1992 and began in 1928, opened their first associate store in 1934 and converting other locations to discount retailers. Last May, opened their first gas bar in 1958 at Yonge and Church Larry, 73, became executive chairman and handed over streets in Toronto, where the company began issuing day-to-day operations to his son Neil, 46, who himself discount coupons later known as Canadian Tire “money.” has been involved in the company for 25 years. In 2001 the company launched its e-commerce site In fiscal 2016, Dollarama’s net earnings rose to and has since shifted its focus from adding new stores $385.1-million or $3.00 per common share on sales to improving its digital operations, although most of $2.650-billion, up from $295.4-million ($2.21) on Canadians don’t mind going to a Canadian Tire store sales of $2.331-billion for fiscal 2015. Return on equity for such items as winter tires, hockey sticks, toboggans is an impressive 63.8%. Dollarama regularly buys back or garden sheds. The company’s website boasts that its shares from shareholders, which enhances per-share more than 90% of Canadians live within 15 minutes earnings. of a Canadian Tire store and more than 80% shop at a Canadian Tire every year. In its most recent management discussion and analysis (MD&A), Dollarama explains that it gets most of its Today Canadian Tire has a network of more than 1,700 products from about 30 low-cost foreign suppliers, retail and gasoline outlets. Along with its namesake chain largely China. that sells hardware, tools, garden products, housewares, automotive and sporting goods, the Canadian Tire retail The company warns that bad weather, particularly just family includes PartSource and Gas+, together with before major holidays such as Valentine’s Day, St. Patrick’s Mark’s Work Wearhouse, which sells casual, outdoor Day, Easter, Halloween and Christmas could hurt both and industrial clothing, and sportswear stores Sport its distribution network and store traffic. Chek, Hockey Experts, Sports Experts, National Sports, Intersport, Pro Hockey Life and Atmosphere. Dollarama went public in October 2009 and except for a minor hiccup in the winter of 2015-16, it has been Canadian Tire’s 2015 annual report showed net steady growth ever since, as the shares are up 909% income of $735.9-million ($8.61 per share) on revenue
20 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 of $13.76-billion for the full year. Sales were up 3.2% at quarterly dividend to the point where the annual dividend Canadian Tire stores and up 4.4% at its sporting goods of $2.60 per share yields 1.88%. retailers, but slipped 0.5% at Mark’s Work Wearhouse. Between these three retailers, Canadian Tire shares In the third quarter of its 2016 fiscal year, Canadian have the lowest price/earnings ratio, the lowest ratio of Tire reported improved results, as revenue (excluding price/book value per share and a price/sales per share ratio gasoline) was up $48.1-million or 1.8% over the same just slightly higher than Alimentation Couche-Tard’s. quarter of 2015. Earnings per share was $2.44, down 6.7% from the third quarter of 2015, which had included In summary, buy Alimentation Couche-Tard if you’re a a gain from the sale of surplus property. When that sale patient investor seeking long-term growth, buy Dollarama is factored out, earnings actually increased by 6.6%, the if you’re a more active trader willing to buy high in hopes company said. of selling higher, and if you’re a long-term, conservative investor seeking slow growth at a reasonable price, buy At a recent price of about $138, Canadian Tire shares Canadian Tire. are up about 250% since 1999. At $138, Canadian Tire shares trade at 15.7 times earnings, twice book value per share and just 0.8 times sales per share. Return on equity is a reasonable but not sensational 13.4%. Over the past Richard Morrison, CIM, is a former editor and investment seven years, Canadian Tire has steadily increased its columnist at the Financial Post. [email protected]
MoneyTip Selling Real Estate Amid New Residence Rules
The family home has been one of Canada’s most well Canadians who ‘flip houses’, for example, will find this known tax shelters. While the Principal Residence new reporting makes it harder to take advantage of the Exemption (PRE) remains, Canadians face a significant Principal Residence Exemption on multiple properties. change in reporting. In the past, homeowners could Owners of cottages and vacation properties will also assume that there was no need to report the sale of a need to coordinate records if they want the PRE principal residence on annual tax returns. to apply to different properties over different time periods. In addition, records will need to be kept when Starting in the 2016 tax year, however, Canadians must changing a residence into a rental or business property report the sale of a principal residence in order for the (or from a rental or business property to a residence). PRE to protect the gain from tax. Failing to report the sale of real estate property may result in penalties from As a result of these changes, the sale or planned the Canada Revenue Agency. purchase of real estate should be discussed with an accountant. This change may have an impact on all real estate sales as this new reporting will enable the CRA to record the specific property and years for which a homeowner Source: Pavilion Investment House is claiming the Principal Residence Exemption. “Selling Real Estate Amid New Residence Rules”, Marshall McAlister, CFA; Cary Williams, CFP
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 21 Investor Awareness Reader Questions Answered: Options Contracts
Keith Richards
s promised in my last column for the on the third Friday of the month unless that Friday is a MoneySaver, I would answer a reader’s holiday, then the options expire on Thursday. Options, question regarding investment strategies. In like stocks, typically have brokerage commissions my last column I answered a question that associated with them – but I won’t include these in the a readerA had regarding the appropriate strategies to invest example below. Just be aware that you will always pay the in ETFs versus individual stocks. In this column, I will trading fees to follow the examples noted below—so it’s cover the basics of options – focusing on the less aggressive not quite as clean a calculation as I provide here. strategies involving these investment vehicles. Please understand that options are often used for sophisticated The price of our imaginary ABC call is $1, meaning “spread” and “straddle” strategies. I won’t be addressing that a call could be purchased for $100 ($1 x 100 shares). these strategies in this column. Moreover, it might be If the stock rises to $30 per share by or before expiry, you noted that I no longer trade options in any form for the could exercise your option and buy 100 shares at $26 per discretionarily managed models I run for ValueTrend as share and sell them for a pre-cost profit of $4 per share Portfolio Manager. However, I’m familiar enough with ($30 - $26 = $4). If you subtract your cost of $1 for the the basic concepts to provide interested readers with the option, your after-cost profit is $3 per share. Alternatively, basics—helping you decide whether you should explore if you didn’t want the stock, you could just sell the option these securities within your own investments. for $4 (the value of the call option is higher due to the stock price). This means you turned the original outlay The Basics of $100 into $400. However - If the stock went nowhere - or fell from the original $26 per share to $24 per share, An option is a contract that gives the owner the the option would expire worthless and you would realize right, but not the obligation, to buy or sell a security at a $100 loss (the cost of the option). a particular price on or before a certain date. There are two types of options: Calls and Puts. The Put Option Call Options A put option is the opposite of a call—it gives you the right, but not the obligation, to sell a security at a certain The call option is the right to buy the underlying stock price on or before a certain date. You would buy a put or security at a certain price on or before a certain date. option if you felt the price of a stock was going down You would buy a call option if you felt the price of the before the option reached expiration. underlying security was going to rise before the option reaches expiration. Let’s look at ABC again. You could purchase a 90 day put option at $24 per share for $100 (or $1 per share), Let’s say that ABC stock is trading at $25 per share and which would give you the right to sell 100 shares of ABC you want to own the stock. You could buy 100 shares of at $24 per share. If the stock drops to $19 per share, you ABC or you could buy a call option, which represents 100 could buy 100 shares on the open market for $19 per shares of the underlying security. Say a call option that share, then exercise your put option giving you the right gives you the right (not the obligation) to buy 100 shares to sell the stock at $24 per share – making a $4 per share in the next 90 days for $26 per share. All options expire profit ($5 - $1 cost of the put). If you already own 100
22 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 shares of the stock, you could just sell your existing shares. volatility (magnitude of movement) of a stock will be in Most people will sell the put at expiry which would now the future. Therefore, the pricing on an option may be be worth $5 per share or $500. too low or too high—something option speculators are hoping to exploit. The price of an option is determined by 4 factors. They are: Let’s now look at a final strategy that ordinary investors –i.e. those not interested in speculating—might want to 1. Current stock price employ within their portfolios. 2. Intrinsic value Covered Calls 3. Time value A covered call is an options strategy whereby an 4. Volatility investor holds a stock and writes (sells) call options to generate increased income. It’s best to write calls on The current stock price’s effect on an option is fairly stocks you own if you expect little or no increase in obvious. The movement of the price of the stock up or the underlying stock price for the life of the short call down changes the price of the option. As the price of a option. A covered call serves as a small hedge and allows stock rises, the price of a call option should rise and the investors to earn extra returns on the stock. The hedge price of a put option should decline. If the stock price comes from the premium received on writing the call. If goes down, then the reverse happens. the stock falls $1/share by expiry, and you collected $1/ Intrinsic value is the value that any given option would call in premium (net)—you broke even for that period have if it were exercised today. An option that has a strike despite the stock’s decline. However, if the stock goes price above where it is trading has no intrinsic value. If up past the strike price you write the call at, you forfeit our imaginary ABC shares were trading at $20 and you the stock's increase past that strike price. For example, own a $25 call option- you have no intrinsic value. Who you own ABC stock, it trades at $25 and you write a call would exercise a call to buy shares at $25 when the stock option for $1 extra income. The option has a strike price trades at $20? An option with no intrinsic value is called at $26. If the stock goes past $26 by expiry, you must “out of the money”. provide 100 shares to the buyer of the option at $26 if it is exercised. So if ABC went to $30 by expiry, all you got Just because an option is out of the money (no intrinsic was $26 (sold to the options buyer) plus $1 extra revenue value) doesn’t mean the option is completely worthless. from selling the option. The more time an option has until it expires, the greater the chance it will end up in the money. There is a chance Options are a complex subject. I have written calls on the stock will rise, if given enough time. Time value of the stocks that I felt were going sideways in the past. But it’s option disappears as the option gets closer to expiry—in not as easy as it sounds – which is why I don’t bother with fact, the time value disappears “exponentially”—meaning the strategy any longer. Remember, you may not sell your it’s not a linear disintegration of value. On the expiry date stock so long as that option is outstanding. So if some there is no time value left in your option. great catastrophe sends the stock or the market down – Volatility, either past (“historical”) or expected you can’t sell your stock unless you buy back the option (“implied”) of the underlying stock affects option pricing. and pay the trading fees associated - otherwise you are If the market believes a stock will be very volatile, option “naked” the option, as it isn’t covered by the stock shares prices rise. If the market believes a stock will be less you hold. True, the option will be at a lower price and volatile, option prices fall. Volatility tries to determine cheaper to re-buy – but you have that added cost and the the magnitude of future moves of the stock. Obviously, associated trading fees to add to your misery. Conversely, if the price of the stock tends to move up or down by, say, if something wonderful happens and the stock soars – you 10% over a typical 90-day period – then you can expect will be “called out” and forced to sell the stock. You will that the option pricing will incorporate that volatility. The miss out on the upside beyond the options exercise price. option would cost more, all things being equal, than if its For this reason, some investors like to sell “way out of implied or historical volatility was only 5% in a typical the money” calls –meaning that the exercise price is well 90-day period. The calculations for volatility pricing are above its current price. But that, of course, means you complex, and inexact. You really don’t know what the get a much lower premium for the option, and you still
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 23 pay those pesky trading fees. You see? There truly is no The information provided is general in nature and is solely for such thing as a free lunch. education and information purposes. It should not be construed as a recommendation to buy or sell a security or to provide investment Before investing in options, spend a fair amount of advice. Options involve substantial risk and are not suitable for all time reading up on them. Talk to somebody who trades investors. The valuation of stocks and options may fluctuate, and, as options in the way you are considering using them – and a result, you may lose more than your original investment. You should ask them for advice. There are stockbrokers who specialize not engage in trading unless you fully understand the nature of the in options, and they may be the right source to start transactions you are entering into and the extent of your exposure to loss. If you do not fully understand these risks you must seek investing with while you learn the ropes. independent advice from your financial advisor. All information is based on the perspectives and opinions of the writer only and every Keith Richards, Portfolio Manager, can be contacted at effort has been made to compile this material from reliable sources; [email protected]. Worldsource Securities Inc., however, no warranty can be made as to its accuracy or completeness. sponsoring investment dealer of Keith Richards and member Before acting on any of the above, please consult an appropriate of the Canadian Investor Protection Fund and of the professional regarding your particular circumstances. Investment Industry Regulatory Organization of Canada.
MoneyTip The Week That Was, The Week That We Will Never Forget.
A more challenging phase for equity investors could lie basis, foreign investors bought a massive $5.3B in ahead as U.S. President Trump must now live up to his Canadian equities. This compares to a $0.3B outflow growth promises. in November 2015. On a trailing-12-month basis, net More often than not, this environment is characterized foreign equity buying in Canada is totaling $30B. by a “sell-on-the-news” investor mentality. This factor Roberge says there is a close relationship between could explain why stocks have stayed flat last week purchases of Canadian equities by foreigners and the despite relatively upbeat earnings reports, notably relative performance of Canadian stocks vs. bonds. among U.S. financials. In reality, it is THE swing factor, hence the question Again last week, currency markets were volatile. While whether foreign buying has become saturated. As the US$ has been tossed around by bearish comments his findings show, while $30B is a big amount by from the new President, the CDN$ (-1.5%) performed historical standards, it represents only 1.4% of the a marked downward reversal when BoC Governor Poloz S&P/TSX market cap. Saturation (i.e., market peaks) spooked markets when mentioning that a rate cut in usually occurs above 2%. Thus, with the Canadian Canada was still on the table. Such a statement is at stock market being very sensitive to global growth odds with upgrades to BoC’s economic forecasts for conditions, the improvement projected this year by 2017/18. world PMIs/LEIs bodes well for further foreign buying Roberge says that, obviously, Poloz was concerned and outperformance of stocks versus bonds. by the CDN$ rally before last week and the negative impact on Canadian exports. Roberge’s focus last week Source: Canaccord Genuity was on Canada’s foreign securities purchases. “The week that was, the week that Data for November were released last week and despite we will never forget” Martin Roberge, much fears about the U.S. election outcome, on a net North American Portfolio Strategist
24 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Asset Location Yes, Bonds Are Still An Important Part Of A Portfolio
Ryan Modesto, cfa
ow that the U.S. Federal Reserve (FED) has decided to increase interest rates and The Devil You Know expects three more rate increases in 2017, There is real value in certainty, especially when it investors may be seeing red in their year- comes to investing. This is what bonds provide. Even if endN investment statements. While seeing capital losses on an individual is guaranteed a 2% capital loss a year (mind a statement is not welcome in any form, investors may be you, the income return could more than make up for dismayed to see it is from an asset class typically viewed this), someone in retirement can plan accordingly with as a stable source of income. Fixed income, also known the understanding that this loss will occur. With equities, as bonds, may be showing losses (or at least declines in you don’t know what you are going to get year to year. value) in the statements that many individuals receive at While the long-term returns should be much greater, year-end, and those losses may only get larger over the investors do not know when those returns will occur. If year. While the initial reaction will be to dump fixed you are in retirement and need that money now, you do income amidst high probability losses, bonds are still a not have the time to wait a few years for markets to turn necessary part of a portfolio. around. The stability and higher level of certainty that After decades of continued declining interest rates (and bonds provide has true value that an investor does not in turn rising bond prices as the two tend to move inverse get from stocks. to one another) many long-term holders of fixed income have become accustomed to some sizable capital gains in Psychological Hurdles addition to a steady income flow. This trend looks like it is ending, as the interest rate path finally appears to be on Seeing account values decline in terms of capital the upswing in the U.S. This means, as interest rates rise, can be tough, but investors often forget to include the bond prices will fall and those capital gains in portfolios distributions that assets pay in return calculations. So will also decline. Not only will this be an uncomfortable while the value of a bond may be decreasing, the total feeling for investors who have enjoyed the ride up, it will return when including distributions could more than be in an asset class that ‘promises’ stability and low but offset the losses. The key metric to pay attention to in this steady returns. So any enterprising investor may conclude case is yield to maturity (YTM). The YTM is the total that if higher interest rates mean lower bond prices and return an investor can expect to receive from a bond if in turn losses in fixed income going forward, they should held to maturity. While a bond can trade at a premium just be sold out of a portfolio, right? Not so fast! While (and lead to a loss on expiry), the distribution can still the return outlook is unlikely to be overly exciting, bonds create a total gain and in turn a positive YTM. So it is still hold an important place in an investor’s portfolio as important that an investor look past simply the capital that investor approaches retirement. To be clear, we are gain or loss and consider the distributions received over not bond ‘bulls’ by any means but have seen increased the life of the asset. questions from our membership along the lines of ‘Bonds are only going down, should I sell them?’ When this Better Source Of Cash happens, sentiment may be shifting too far in favour of other asset classes and the case for less loved but still In line with comments on yield to maturity, bonds are important assets should be made. simply a better alternative to cash as they will still generate
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 25 a positive total return. Cash guarantees investors to lose chart below looks a bit difficult to digest but it is worth money to inflation. Bonds will at least offer a meagre taking a few minutes to grasp it. return. Further, bonds can still be viewed as a source of cash. If the next financial crisis or some other pullback in We think there are a few noteworthy points to make here: the markets occurs, there is no reason a bond allocation couldn’t be viewed as a source of cash for rebalancing into 1. A 10% downturn and flat market for another unloved or underpriced assets. year are not unreasonable scenarios while a 20% downturn is possible any given year Withdrawing From A Portfolio 2. A before tax withdrawal rate of $45,000 is not In A Downturn Is A Wealth Killer an aggressive assumption If an investor eschews bonds in favour of equity, 3. The analysis does not include fixed income there is potential for material wealth destruction if a returns (no returns assumed), meaning in a downturn does occur at some point. We have outlined downturn scenario, those with more fixed two portfolios, one worth $1,000,000 and another worth income would likely fare even better than $750,000 with each portfolio showing different equity indicated weight scenarios. The analysis considers the impact of a market downturn at the varying levels of equity when 4. It also assumes the investor does nothing during withdrawing $45,000 from the portfolio. The analysis the downturn (i.e. sell equities at the bottom). considers two downturn scenarios where markets decline The more equity held in the portfolio, the more 10% and 20% in the first year then are flat in the second likely the investor will sell at the wrong time in year. Withdrawals of $45,000 are made in both years. The a downturn.
Impact Of Withdrawals During A Market Downturn
$1,000,000 Portfolio $750,000 Portfolio
95% of 85% of 75% of 50% of 95% of 85% of 75% of 50% of portfolio portfolio portfolio portfolio portfolio portfolio portfolio portfolio in Equity in Equity in Equity in Equity in Equity in Equity in Equity in Equity Equity Portfolio Size $950,000 $850,000 $750,000 $500,000 $712,500 $637,500 $562,500 $375,000 Annual withdrawal rate 4.50% 4.50% 4.50% 4.50% 6.00% 6.00% 6.00% 6.00% Portfolio size after 10% market $905,000 $915,000 $925,000 $950,000 $678,750 $686,250 $693,750 $712,500 downturn Portfolio size after $45K $860,000 $870,000 $880,000 $905,000 $633,750 $641,250 $648,750 $667,500 Withdrawal Decline from original value -14% -13% -12% -10% -16% -15% -14% -11% Year 2 portfolio value after $815,000 $825,000 $835,000 $860,000 $588,750 $596,250 $603,750 $622,500 withdrawal and no returns Decline from original value -19% -18% -17% -14% -22% -21% -20% -17% in Year 2 Portfolio size after 20% market $810,000 $830,000 $850,000 $900,000 $607,500 $622,500 $637,500 $675,000 downturn Portfolio size after $45K $765,000 $785,000 $805,000 $855,000 $562,500 $577,500 $592,500 $630,000 Withdrawal Decline from original value -24% -22% -20% -15% -25% -23% -21% -16% Year 2 portfolio value after $720,000 $740,000 $760,000 $810,000 $517,500 $532,500 $547,500 $585,000 withdrawal and no returns Decline from original value -28% -26% -24% -19% -31% -29% -27% -22% in Year 2
26 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 In addition to the points above, we think there are a • Using a $1 million portfolio, at a 7% assumed few key takeaways: total return going forward and with the same annual withdrawal, it would take 11 years to make • The larger a portfolio and less equity held, the back the money in the 10% downturn scenario less an investor feels any impact from a downturn. with 95% equity. It would take eight years under • Portfolio size matters – Larger portfolios have the 50% equity scenario. more of an ability to weather any storms while • Using the $750,000 portfolio, across all scenarios the constant value of withdrawals (living costs using the same withdrawal rate, an average of likely can’t change) has a bigger proportionate 7% returns would not be enough to offset the impact on the smaller portfolios. Additionally, withdrawals and the portfolio size would be in larger portfolios can withstand ‘more years’’ continual decline. While the portfolio would be worth of downturns while smaller portfolios large enough to support retirement needs in most have less flexibility. This leads to psychological cases, it would be very unlikely to reach historical pressure while investing. Put simply, the smaller portfolio values. the portfolio, the less room for error and/or risk. Ryan Modesto, CFA, is Managing Partner at 5i Research • In the extreme scenarios, a third of an investor’s Inc. in Kitchener, Ontario. He can be reached at life savings can be eliminated in two years. [email protected]
MoneyTip
The Incredible Shrinking Stock Market
Here is an important and remarkably stylized fact that Over and above the investment implications, the many investors are not aware of; the US stock markets shrinking stock market is also important because have shrunk in size by more than a third since the it impacts growth in the economy and potentially year 2000. As a result, the number of publicly traded job growth as well – a key hallmark of the political companies on the US exchanges is now roughly equal environment right now. Small and medium-sized firms to the level last seen in 1990. This shrinking stock are often described as the engine of job growth, so if market comes despite an economy that has nearly there are fewer firms with access to financing via equity tripled in size during that period, and an increasing markets, then that’s bad for the country as a whole. total market capitalization of the overall stock market. On the whole investors today don’t have the same The decline in the number of firms is not solely a opportunity set that they once did. There is no direct byproduct of the bursting of the 2000 dotcom bubble, cure for this of course. International diversification nor the 2008 recession as the figure below shows. can help, but country risk is something many investors Instead, the decline has been measured and persistent just aren’t comfortable with. Instead investors need to for more than a decade beginning in the late 1990’s. accept the fact that the companies they are investing The shrinking number of firms, but rising total equity in today do not necessarily reflect the broader US value has resulted in growth in the mean firm’s size. economy for better or for worse. Accepting that and There are two reasons why investors should care investing accordingly requires investors to shift their about the shrinking stock market. First it makes it mindset and focus on what will make a particular large harder to hold a diversified portfolio that is broadly company successful rather than investing based on representative of the overall economy. Second, if what trends are occurring in the broader economy. there are fewer firms then investors can pay more attention to each of those firms, making it harder to Source: Deal Breaker find undervalued below-the-radar assets. “The Incredible Shrinking Stock Market”, Mike McDonald, PhD
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 27 Investing The Costs Of Investing
Scott Ronalds
ould you be OK with investment to investment managers for selecting and managing the costs of 5% a year? I can already stocks and bonds in the funds, and the management fees hear your response, “No bloody associated with owning ETFs. These fees can range from way.” Yet, many investors face costs 0.2% (for a portfolio of low cost ETFs) to 2.0% or higher in thisW neighbourhood because they’re unaware of all the (for certain mutual funds). For a $100,000 portfolio of components that eat away at returns. Our accompanying bank or broker-sold mutual funds, these fees will typically infographic reveals the key factors that play a role in the be in the range of $1,000 to $1,500 per year. often-murky world of investment costs. Think of these two cost components (advice and These costs range from commissions to advisory fees service, and product fees) as the hard costs of investing. to the real wild card – our own behaviour (i.e. when and They can be significant, which is why it’s important that how often we buy and sell). New reporting requirements investors understand them. that are now in effect (referred to as “CRM2”) will provide investors with better, albeit incomplete, information on Behaviour Impact their hard costs and performance. Many investors will The other cost component is behaviour, or the impact receive their first “Summary of Costs” report in early of short-term focused advice and emotionally driven 2017. investment decisions that may cause investors to veer The investment media anticipates that this ‘great from their plan, usually during stressful or euphoric reveal’ will be an eye opener for many Canadians. But times in the market. This is a soft cost that firms rarely while the new reporting requirements are a step in the measure or report, but it can have a much bigger impact right direction, investors should be aware that the new on returns over time. reports do not include a potentially large component of Research from Dalbar (a U.S. financial research firm) their overall costs – namely, product fees (which may indicates that investors underperform the funds they also be referred to as investment management fees). We invest in by 3%+ per year over the long haul because explain the various costs below. of poor behaviour – e.g. reacting adversely to market Advice And Service Fees news, chasing short-term returns, and generally trading too much. The costs that will be shown to investors can be categorized as “advice and service fees”. These include When you read your new investment statement this administration fees, trustee fees, transaction fees, sales year, it’s important to remember that there’s a good chance commissions, trailing commissions and other advice- you’re only seeing a partial accounting of your costs. For related fees paid to investment providers. The fees may the full picture, you may have to press your advisor or range from 0% to 1.5%. Investors who work with full- investment provider. Fees are one of the few things you service advisors should expect their fees to come in at the have control over when it comes to investing, however, higher end of this range. For a $100,000 portfolio, these so don’t be shy! fees will typically be in the range of $1,000 to $1,500 per year. Scott Ronalds, BA, Manager, Research & Communications, Steadyhand Investment Funds Inc., Vancouver, BC Product Fees (Investment Management) (888) 888-3147, [email protected], What’s missing in the new reports are the fees paid www.steadyhand.com
28 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 29 The views expressed in this column are solely those of the author and ••• POINT OF VIEW ••• do not in any way represent the views Canadian MoneySaver Magazine.
Embedded Commissions On The Way Out? by John J. De Goey, cfp, cim, fellow of fpsc, Portfolio Manager with Industrial Alliance Securities (iAS) and author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by iAS.
he ongoing availability of embedded trailing opinion-based lobbying going on now is being wasted. commissions might just be about to end Overly facile arguments based on anecdotal evidence Tin Canada. A report on the subject from no longer cut it with regulators, who finally seem the Canadian Securities Administrators (CSA) was determined to go to great lengths to make concrete, released on January 10, 2017. We’re now left with demonstrable, evidence-based recommendations and operational questions about how to implement the policies. recommendations. Some stakeholders remain in denial While I applaud an evidence-based approach, the about this development and are using questionable question that this begs is: “If regulators were so reasoning and public relations in an attempt to divert determined to make policies based on verifiable attention to maintain the status quo as long as possible. evidence, then why did they squander an entire While not certain, the writing seems to be on the wall generation listening to unsubstantiated stories in the that embedded commissions are on the way out. first place?” Stated differently, if regulators weren’t The possible decision to discontinue will not be about going to do something tangible until they had hard “client choice” or any so-called “advice gap”, rather it evidence that embedded compensation causes bias, will focus squarely on eliminating conflicted advice. More then why did they wait until 2015 to look for that choice isn’t necessarily better choice. Furthermore, evidence? They would have found it in 1995 when to hear a number of commentators tell it, there will Ontario Securities Commission (OSC) commissioner be a small army of small investors who will turn away Glorianne Stromberg wrote a report recommending from financial advice because they cannot “afford” it. discontinuation. The only reason they didn’t have Assuming they’ll continue to pay the same amount, evidence is that they didn’t request it. that’s simply not true. How you pay has no impact on Note that a final decision is likely a long way off. The how much you pay; four quarters does not cost more paper will be available for comment for 150 days, so than a dollar. People who choose to forego advice in the that brings us to about the end of Q2. Then, the various future will do so because they do not perceive it to be submissions will be read and synthesized into some worth the cost; not because they can’t “afford” it. How form of a final recommendation document. Realistically, exactly does changing the way you pay for advice have we’re talking about those recommendations being any impact on your ability to pay for it? made in the second half of 2017 with implementation The dual smoking guns of the Brondesbury Report1 coming after that. and Cumming Report2 (both released in 2015) have Canada has been a regulatory laggard thus far, but the likely put the final nails in the embedded commission phrase “better late than never” clearly applies in this coffin. The evidence is simple: embedded compensation case. Nonetheless, this is unambiguously good news unambiguously leads to conflicted advice — and there for consumers. is no place for that in the world today. The only things left to decide are: • When to discontinue? 1 http://www.osc.gov.on.ca/documents/en/Securities- • How to discontinue? Category8/rp_20150611_81-407_mutual-fund-fee- • On what terms do we discontinue? research.pdf 2 http://www.osc.gov.on.ca/documents/en/Securities- Much as many people have lamented the slow pace of Category8/rp_20151022_81-407_dissection-mutual- reform in Canada to date, the sense I get is the public- fund-fees.pdf
30 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Travel Insurance Advice The Elusive And Misunderstood Stability Clause In Travel Insurance Policies
Isabelle Beaudoin
n his June and July 2016 CMS articles: Beware of questionnaires and eliminating contracts riddled with Policy Gremlins, Bruce Cappon1 alerted Canadian punitive clauses, it is of the utmost importance to review MoneySaver readers about the ambiguous and the insurer’s “Stability” requirements meticulously. The ill-defined wording (“Gremlins”) found either in favourable underwriting of your claim also hinges on theI questionnaire or in the policy declaration statement how careful you are when going through this process. of some travel insurance policies. He recommended A lead time of at least three weeks is recommended avoiding these contracts. In Part II of his article, Bruce when applying as you may have to verify the content of further warned how younger applicants or anyone exempt your medical file with your doctor. Please note, we are from completing a medical questionnaire would not be not suggesting that your doctor completes the medical sheltered from a devastating large claim denied (“Million questionnaire. As Bruce Cappon wrote in the past: Dollar Baby”2). This is because any pre-existing or new “Doctors who wish to help their patients by completing medical conditions which develop prior to departure these medical questionnaires on their behalf are walking would also be assessed at claim time against the “Stability into a minefield… consult an insurance broker with Clause”. comprehensive knowledge of how each company defines the issues, and who could assist them in completing an Travellers who are not required to complete a medical application appropriate to those definitions.”3 questionnaire may be completely oblivious to the fact that this stability clause applies to them as well (e.g. students, By rushing the application process you are putting sports teams, young families, etc.). The “Stability Clause” yourself at a disadvantage and possibly at a higher chance can be easily overlooked because it hides in the definition of a claim denied. When going through the application process, ensure you: section at the back of the policy. Therefore, when encountering the word “stable” in the policy contract, • Obtain a copy of the initial medical be sure to check its definition in the policy’s glossary. questionnaire you complete Applicants naturally rely on their doctor’s reassurance that they are “stable” to travel. It seems like common sense to • Demand the policy wording and the quote in do so. Unfortunately, when it comes to travel insurance, writing to give you time to review everything a doctor’s interpretation of stability may widely differ before binding the contract. from the insurance companies’. The policy definition • Ensure a licensed broker is available to answer will prevail at claim time. The focus of this article is: all the questions you may have about the to review the insurer’s stability requirements, to clarify quote and/or the policy definitions. Ask your the definitions and how it diverges from your doctor’s broker whether the policy you’re applying for interpretation. Finally, what to do if you do not have would be voided if you made a mistake on the required stability or if you lose it prior to departure? the questionnaire After extensive research of the travel insurance market, • Verify if it contains the optional stability you’re confident you’ve found a plan, which offers generous rider if your health changes before departure. options including a “compassion clause”. However, after doing your due diligence avoiding ambiguous medical Whether you are completing a questionnaire or not,
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 31 scrutinize the insurance carriers’ stability requirements, it’s the exact opposite. The medical condition affected by as follows: this “alteration” has suddenly become unstable and will NOT be covered in the event a claim is triggered by this 1. Find out the stability duration requirement: condition unless you add a stability rider (if offered by the These requirements vary greatly depending on the insurer). This is with lenient companies! Other insurers insurer. The stability period can vary from 90 days, may void your whole contract if you have an unreported 180 days up to 365 days. The shorter the duration, change prior to departure. the better. Insurers will not cover pre-existing medical conditions, which are unstable within Remember this is post-claim underwriting and the your prescribed timeframe prior to departure. insurer relies on you to be accurate when going through Your stability period is typically determined by this assessment. They will only underwrite your policy the answers on your questionnaire, or by age if and verify the accuracy and veracity of your answers at you are not required to complete one. claim time by obtaining your medical file. For younger people, the stability requirement can be risky because in 2. Next, you’ll need to determine if your pre-existing the absence of a medical questionnaire, many travellers are conditions are stable within your designated totally unaware they could still have their claims denied. stability period. But, how do insurers define stability? One example of stability definition 3. What are your options if you determine that some could be: of your pre-existing conditions are not “stable” as per the insurer’s definition? This is where the You are stable if careful selection of your plan is tantamount to a. There has been no deterioration of your condition having your claim paid or denied. By selecting a as determined by your physician, and policy with an optional stability rider, you increase your chances of at least being eligible for some b. There have been no new symptoms or findings or coverage if you are or become unstable during the more frequent or severe symptoms or findings, and term of the policy. Please note that if you buy an annual plan, the stability is evaluated prior to each c. There have been no symptoms experienced by you departure. You’ll enjoy a more worry-free vacation related to the condition that remains undiagnosed, by choosing to add this rider. and In a nutshell, if you have pre-existing medical d. There has been no change in medical treatment conditions which are or become unstable within your (important: review the insurer’s definition set stability period prior to departure and you are faced of treatment carefully as it likely includes investigative testing!), and, with the dilemma of travelling without coverage or with limited insurance, (i.e. excluding your unstable pre- e. There has been no alteration (increase, decrease or existing conditions), you should make sure you have stoppage) in any medication for the condition, and the option to purchase the “stability rider”. If the policy does not offer this option, move on. Without this rider, f. There has been no new medical treatment the insurers may cancel the contract days before your prescribed or recommended by a physician or departure date, or raise the premium and exclude these received. unstable conditions. Other more flexible providers will give you the option to purchase a stability rider which A few important things to keep in mind. The word “Treatment” in travel insurance policies can be deceiving. would cover your unstable conditions between $150,0000 It may have a very broad meaning, which includes for or $250,0000 and reduce the stability period for those example any prescribed therapeutic treatment such as unstable conditions to 8 clear days prior to departure, for physio or even investigative testing. Please refer to the example. We recommend you inquire about the stability definition section of the policy. rider at time of purchase. Also, if you buy an annual plan, ensure you have the option to add the stability rider at I also want to bring your attention to the word any time during the policy year if your health changes. “alteration”. This is where your doctor’s definition of Finally, ask if the stability rider is a “blanket rider”, which stability may clash with that of the insurer. In your will cover ALL unstable medical conditions (current doctor’s opinion, if you decrease or stop a medication, or future). Beware of companies which charge you per you are more stable than before. For insurance companies, condition.
32 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 Another word of caution: Please review the exclusion of all your major conditions (those that would likely cause associated with the stability rider. Certain factors may an expensive claim while vacationing). Secondly, check nullify its protection. The most important one is if you with your travel insurance broker to make sure the policy have tests or results pending the return of your trip. In offers an optional blanket stability rider in the event you that case, the stability rider will not cover the specific need to add it at the time of application or post purchase if unstable condition, which is still under investigation. your health changes prior to departure. And of course, the However, any other unstable conditions, where all tests more time you have between application and departure and results have been obtained within the stability rider’s dates, the better your chance to build stability! waiting period remain covered. Remember, all test/results must be obtained typically 8 clear days prior to departure to be covered by the stability rider. Isabelle Beaudoin, Travel Insurance Specialist, President, First Rate Insurance Inc., Ottawa, ON (800) 884-2126, With the “Misrepresentation Clause”, you know [email protected], www.firstrateinsurance.com that one (wilful or candid) mistake on the medical Isabelle has been working in the insurance industry for questionnaire can void the entire contract at claim time the past 22 years specializing in Critical Illness and Travel with certain insurance companies while others will Insurance coverage. After her mother experienced a major impose a monetary penalty prior to paying the rest of the illness, she studied and obtained her full life insurance licence claim. The “Stability Clause”, on the other hand, is more in 1997 and co-founded First Rate Insurance in early 1998. elusive, with its definition hiding in the glossary at the She has since dedicated her practice to emergency medical, back of the policy. It can be easily overlooked especially including travel insurance and critical illness coverage. when we naturally rely on our doctor’s reassurance that we are “stable”.
Unfortunately, your doctor’s interpretation may be 1 “Beware of Policy Gremlins” Bruce Cappon, Canadian at odds with the policy definition. Furthermore, the MoneySaver June/July 2016“ “Stability Clause” impacts ALL applicants whether they 2 “Million Dollar Baby” CTV interview with Bruce Cappon are required to complete a medical questionnaire or not. https://youtu.be/tnDBbagHjPY Therefore, one important step of the application process 3 “Pitfalls to Avoid In Snowbird Patients’ Health insurance”, is to match your assigned stability period with the stability Bruce Cappon, Canadian MoneySaver, March/April 2013
MoneyTip
Changes To The Small Business Deduction
Small business owners likely will experience a Instead, in order to claim the reduced tax rate profound change in 2017 – and most have no on income up to $500,000, businesses may have idea it is coming. In 2017, Bill C-29 is expected to prove that they do not transact business with to become law and, in the process, may make it ‘certain corporations’ and/or ‘related persons’. extremely difficult to access the small business With potentially significant yet vague changes like deduction. This could effectively double the these, receiving professional tax planning advice corporate tax rate for small businesses. becomes critical. Small business owners should At this point, the details on exactly how Bill C-29 contact their accounting professionals as soon as will affect businesses are vague. However, it possible to begin planning for this change. does appear that small businesses no longer will be able to assume that they qualify for reduced Source: Pavilion Investment House tax rates through the small business deduction. “Changes to the Small Business Deduction”, Marshall McAlister, CFA; Cary Williams, CFP
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 33 ReadersWrite Lessons I’ve Learned 22 Years After Taking Early Retirement Romeo R. Fernandez -Part 1 A Canadian MoneySaver Reader
n 1994, under the Factor 80 early exit program, new and useful information from former and present I was forced to retire at an early age of 54 due contributing editors to apply to our family’s needs, but I to downsizing in the Ontario Public Service I also find it elating to read articles reinforcing what (OPS). This traumatic event had a happy ending my wife and I have been implementing since we got for me and culminated in my writing an article for married in 1969. Canadian MoneySaver, "A Common Sense Approach to Financial Independence", which was featured in I continue to enjoy reading articles by Brenda March 1997 issue, courtesy of MacDonald as some of her writings former publisher Dale Ennis. touch family issues and values.
Modesty aside, the article was 2. I find former contributing well received by CMS readers editor Carolyn Williams’ statement across Canada. Readers were that “government employees are congratulating me and asking for instant millionaires” in her article more details how I managed to Longevity Insurance, May 2006 retire at that early age, with my issue, to be quite true. According wife a full-time mother and wife, to some CMS articles, I may and one of our sons was a third- not be considered a millionaire year university student and the without including the current other was a grade 8 student. value of our 1-storey, 2-bedroom, fully detached bungalow primary Despite some job offers, including residence in Toronto, which to work as an estate planning is now worth not less than specialist with our family $800,000 (purchased for $37,500 investment advisor, I remain in 1973). Nevertheless, given fully retired since 1994. My my guaranteed for life defined family does not want me to pension plan (fully indexed to subject myself again to office stress and pressure. inflation) and the extended health benefits that come They wanted me to enjoy my retirement. with it from the OPS, my wife and I live comfortably I thought sharing how life has treated me and the with this pension, without touching our registered and lessons I learned after early retirement might also be non-registered accounts. But this is a very expensive of interest to CMS readers. pension plan that only the public sector is able to afford. With the Ontario government having constraints again I continue to read Canadian MoneySaver 1. this time, new retirees scheduled to receive their first magazine, which I have read since it launched in 1981, pension cheque starting January 1, 2017, allegedly will the year our second son was born. Even if I glean 5% be expected to pay for many of their extended health new tips or information, to me it’s worth every penny benefits effective this date. Fortunately, since I retired of its economical subscription rate. Not only do I learn in 1994, the grandfather rule means I am not affected
34 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 by this constraint. When I die, my wife would enjoy 50% 2011, I converted my Self- of my pension and 100% extended health benefits for Directed RRSP (SDRRSP) life. into a Self-Directed RRIF (SDRRIF), with a market 3. We considered ourselves lucky since my generous value of $186,130 as pension from OPS, my wife’s ‘negligible’ pension from of Dec 31, 2011, with OMERS (she stayed home for 17 years to raise our two benefit withdrawals sons and retired early too), plus our individual CPP commencing January and OAS benefits enable us to sustain our daily needs 1, 2012. Again, comfortably without touching our investment and because of my registered accounts. generous pension from OPS, and for This is possible because we still live within our means, estate planning despite travelling a lot since our early retirement. We purposes, I elected for minimum never keep up with the Joneses. Amongst our few, quarterly payments based on my wife’s younger age selected circle of friends, we’ve got the oldest and the (minimum mandatory withdrawals but for longer smallest house but we’re happy with our “home.” benefit). I also designated my wife as my beneficiary 4. It pays to have an investment account for retirement and successor annuitant of the plan. The market and old age needs. For estate planning purposes, I hold value of the plan as of Dec 31, 2016 was $193,686, it jointly with my wife (in the 6-digit figure). Using more than when it started on Dec 31, 2011, and after management by exception technique, I don’t spend withdrawing a total amount of $68,878 from January 1, 2012 to December 31, 2016. Effective calendar year much time managing the account. I review the account 2017, the government reduced the payment rate by not more than twice a year, every six months, while approximately 2% starting at age 71 . The rationale reviewing the monthly brokerage statements. was the average retiree is living longer and not all of It pays to have a reliable and honest investment advisor them want the additional income. To keep the income and associates who understand our investment needs levels lower to enjoy the benefits longer, my RRIF and work for us to achieve our investment objectives. payments will fund our travels longer. Because my Whenever I need to make changes to the account, I wife does not have a good pension plan at work for request for three alternative products from them and staying home to raise our two sons, when I die, any of their rationale for recommending them. I then make my unused RRIF benefits would be passed on to her, as the final product selection after doing some research successor annuitant, without paying any taxes in the using free information available online. I use this rollover. Because I can afford to take some risks, my technique believing they are in a better position than plan is invested in Canadian and U.S. mutual funds that me following the investment momentum, where the pay good monthly dividends with growth potential. interest rate is heading, and other investing factors 6. It pays to contribute to an unemployed spouse’s needed. I just wanted to have more time to enjoy my RRSP Account. While my wife was raising our two sons retirement and address health issues associated with and unemployed, I contributed to her RRSP account getting old (I will be 77 in April 2017). from my limited contribution room. Although not So far, in spite of market volatility, all my investments much, the market value of my wife’s account as of are up. I invest in mutual funds and individual stocks, December 30, 2016 was $109,139, invested in stocks and mutual funds. My wife will turn 71 in 2017 and at some of which my investment advisor and her family the end of this year, she’ll be converting her SDRRSP also invest in. Because of my benevolent pension from into SDRRIF Account. the OPS, and because we still live within our means, I can take some risks in my investments. Starting January 1, 2018, she’ll be eligible to receive the minimum quarterly payments. Again, although 5. It also pays to have a RRSP/RRIF account for not much, this will be another source of our regular retirement and old age. Because I belonged to a defined pension income earmarked for our travel funds. benefit pension plan, I could not contribute much to my RRSP when I was working. When I turned 71 in Watch for Part 2 in a future edition of CMS.
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 35
vevh7qKYpxZbkOB5t5meoIZOdhC8QAvx6L8PfE-qeKffbA Q Thank you for your article on tax changes in Canadian Moneysaver. However, in your paragraph on the principal Nj2jTpM64Jqv2tFsvuscY3iVvUAyULiW5fulH663FDsHLT- residence exemption I missed the changes on exclusion of a VlcroFaI91TtJwYCW98VuGZ&typo=1 business/income portion on the exemption. So what are the consequences? Do I have to know the The old rules were: "The CRA Rental Income Tax Guide, adjusted cost base of the residence on the date I started T4036, and S1-F3-C2 renting? I am still not allowed to make major changes? I am allowed CCA now, as I have to pay capital gains? Principal Residence (see partial changes in use) state that if all of the following conditions are met, you will not be As a Toronto home owner I have major gains on my principal considered to have a change in use: residence, and if I have to pay taxes on a third of that renting a basement apartment may no longer be attractive. - the part of the home used for rental purposes is small in relation to the size of the whole property, CMS Reader
- you do not make any structural changes to the property to make it more suitable for rental purposes, and A My comment would be that CRA has not changed their treatment in respect of the principal residence - you do not claim any capital cost allowance on the part exemption where a portion a home is rented out. you are using for rental purposes." As you note, the current CRA rental guide refers to the So one could just put in a basement apartment, as many rental portion being “small” in relation to the whole size Torontonians have done, without fear of loss of the principal of a property. residence exemption. If a homeowner is simply renting out a room or a small Suddenly, without warning, the rules have changed. The portion of the basement the use is likely “small” and the CRA writes: whole home should qualify for the principal residence exemption on its sale. "If only a part of your home qualifies as your principal residence and you used the other part to earn or produce You further note that CRA cautions that where a homeowner has made structural changes to their home income, you may have to split the selling price and the in order to rent out a portion that this would taint adjusted cost base between the part you used for your the claiming of a full principal residence exemption principal residence and the part you used for other purposes on eventual sale. An example would be where a home (for example, rental or business). You can do this by using owner has, in effect, changed their home into a duplex square metres or the number of rooms, as long as the split by creating a self-contained rental unit. Presumably, is reasonable." this may entail creating a separate entrance for the This rule change is so new that the revised Guide T4037 has rental unit, separating the rental portion form the rest not been published yet. of the house, etc. https://linkprotect.cudasvc.com/url?a=http://www. If in 2016 a homeowner did structural changes to have cra-arc.gc.ca/gncy/bdgt/2016/qa11-eng.html&c=E,1, a rental unit put into his or her home that would be
36 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 considered a partial disposition of a principal residence. 2. Sort all statements for all years into sets by account Under the new rules this would need to be indicated number; place in date order; file each account # in on his or her 2016 personal income tax return. On the a separate folder; place all folders in a banker's box. eventual sale of the home a full principal residence 3. Set up an account register for each account, for each exemption would not be available to the homeowner. person. Enter cash in and out of the cash account in BRIAN J. QUINLAN, CPA, CA, CFP, TEP, the account register for each account Partner Campbell Lawless LLP 4. Enter non-cash transactions in the account register by investment name with details such as # of units and price, exchange rate if foreign currency, in Q How would one develop a system for keeping track of an account register by account, categorizing as trades (DRIP, mutual funds, options, stocks, etc.), especially dividends, return of capital, capital gains or losses, for day and swing traders, to minimize the work of reporting etc. these trades on one's annual tax return? One of the reasons I have not been an active trader is that I want to have a 5. Keep a sub-ledger for each investment by name, clear, understandable system in place so that preparing my showing the purchase, dividends, dividends tax return will not be too complex or time-consuming. reinvested, sales proceeds, average cost on sale; losses may be deferred; used on eventual disposition CMS Reader by another related party 6. Reconcile cash to cash balance per account frequently A Transaction history is valuable, it may be your only proof of ownership. Gather historical records of 7. Reconcile investments by # of units/shares and all cash and non-cash transactions for every account; calculate Adjusted Cost Base; compare # of units/ not just your own accounts; include joint, related shares to account statement persons, company and trust accounts. Include all types 8. Convert # of units to Fair Market Value for of accounts; unregistered (bank, mutual fund, life comparative and decision-making purposes insurance or brokerage), and registered (RRSP, LIF, RDSP, RRIF, RESP, TFSA). 9. Reconcile taxable and non-taxable income, or changes in ACB resulting against T-slips and trading Record all transactions in a register; check the math; results for dispositions - check the loss rules for ensure income reported and ACB (adjusted cost base) related parties is correct. Note disclaimer on every account? It is your responsibility to check the math. Tax rules extend 10. Report income and capital gains/losses on tax beyond the individual taxpayer and their account to return each year, adjust ACB for non-cash/non-unit/ transactions in accounts the bank or broker have no share transactions knowledge of or access to. EILEEN REPPENHAGEN Capital gains were introduced in 1971. In 1984, there TaxDetective® was a special election for capital gains that you were supposed to keep for when you sold those investments or property. For a more in-depth study of investment You must accompany your inquiry with tracking, click on my blog post here http://taxdetective. blogspot.ca/2012/09/historical-backgrounder-on- your Membership Number (ID) and investment.html telephone number or e-mail to have your 10 Steps to Keep Track of Trades question reviewed. Inquiries are responded 1. Gather all account statements for each family to directly and the Q&A may be published member and corporation or trust for all years since here later. Hundreds of Q&As are found inception of investing on www.CanadianMoneySaver.ca
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 37
This column offers excerpts from published and online sources to provide other viewpoints.
ALTAGAS MAKES A BIG BET IN THE US
AltaGas entered into an agreement to acquire WGL than WGL’s WACC of 5.6%. As power and utilities Holdings, a U.S. gas utility company with a growing businesses typically have low costs of capital due to midstream business in the Marcellus/Utica. ALA has the regulated nature of earnings and overall stable indicated that the deal is expected to be accretive demand for services provided, there is a potential for upon closing (end of Q2/18) and the accretion is a further reduction in AltaGas’s WACC. expected to continue through 2021. Upon closing, ALA will target an 8%-10% annual dividend growth Potential for Valuation Contraction?: rate through 2021. As we have highlighted on several occasions, the evolution of ALA’s asset mix to a higher power/utility More Visibility Needed: mix could eventually cause investors to re-evaluate While there appear to be many positives to the ALA’s appropriate valuation multiple. The midstream acquisition, we prefer to remain on the sidelines until peer group is currently trading at 12.8x 2018E there is more clarity around the ultimate sources EBITDA, above the Power group at 11.2x and well of funding as well as more visibility around growth above the Utility group at 9.4x. Applying valuations projects and potential earning contributions. for Power and Utility groups to ALA’s suggested 2019E • Identified ~$7.3B of combined capital EBITDA weighting could suggest a current share price investment opportunities through 2021. of ~$17.88, well below current levels. However, given the current sustainable dividend yield of 6.7% (with • Our outlook only incorporates ~$4.2B, which further upside) it seems unlikely the shares could have received FID. approach this level. • Our debt levels are higher than ALA has suggested as we assume no asset sales (target Valuation: of ~$2.0B). We will update our assumptions We have incorporated WGL into our outlook for AltaGas once we have more information around which and have rolled our valuation to 2019 incorporating assets are for sale and potential earnings that a full year of the consolidated companies. Our price will need to be removed. target is reduced to C$33.00 from C$35.00, reflecting higher earnings from the consolidated entity (based Asset Mix Weighted Toward on 2019E EBITDA) offset by dilution from the $2.5 Power/Utilities: billion subscription receipt offering and higher debt While ALA’s 8.2% WACC is at the lower end of levels. midstream peers (10.1% avg.), it is much higher than the Power and Utility groups of 6.9% and Source: Canaccord Genuity 6.8%, respectively. It is also significantly higher
38 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 CANADIAN MONEYSAVER SUGGESTED CANADIAN DIVIDEND REINVESTMENT PLANS (DRIPS) 8% n/a n/a 3.6% 6.5% 5.3% 5.8% 5.1% 7.1% 4.4% 3.7% 5.9% 8.4% 8.9% 1.7% -6.0% -5.5% 10.2% 10.1% 10.4% 10.2% 15.9% 10.9% 10.8% 16.8% 23.1% 22.1% 15.2% Growth Growth 5 Year Div 5-Yr Dividend >100 43.4% 44.5% 40.2% 48.2% 65.8% 23.1% 66.8% 84.6% 68.9% 28.3% 73.3% 73.1% 46.2% 42.6% 95.5% 45.2% 81.8% 96.0% 83.3% 21.9% 58.4% Payout 174.5% 114.4% 121.8% 101.3% 201.9% 122.4% Ratio % Payout Ratio n/a P/E P/E 11.1 16.9 15.4 12.3 12.7 16.5 18.3 29.2 24.8 24.0 74.1 13.07 36.86 11.27 13.46 27.29 21.11 19.81 16.21 23.01 19.70 16.82 19.22 13.07 17.83 24.20 16.92 EPS EPS $3.87 $1.10 $5.03 $1.84 $1.39 $1.33 $2.28 $2.60 $2.14 $2.67 $1.22 $9.18 $2.62 $2.19 $6.41 $5.17 $2.20 $7.78 $2.30 $3.51 $0.75 $2.51 $1.04 $0.49 $0.89 -$0.11 $23.76 $10.28 Yield Yield 3.32% 4.73% 3.95% 2.99% 4.19% 0.88% 5.77% 4.35% 3.32% 1.42% 3.96% 3.68% 3.49% 1.84% 4.36% 3.80% 3.74% 3.25% 5.35% 3.56% 4.19% 4.97% 5.67% 4.56% 6.92% 2.86% 5.11% 0.79%
Div Div $1.68 $1.92 $2.24 $0.74 $1.59 $5.20 $1.62 $4.96 $1.50 $0.60 $1.43 $2.26 $0.84 $2.60 $1.92 $1.60 $2.96 $2.20 $2.10 $3.52 $2.33 $2.87 $0.72 $2.09 $2.10 $1.16 $0.60 $0.52 Price Price $50.57 $40.55 $56.71 $24.76 $37.93 $28.08 $45.17 $42.14 $36.10 $61.43 $24.04 $44.07 $42.10 $79.06 $67.59 $39.23 $98.90 $55.67 $57.74 $12.69 $45.88 $30.36 $40.62 $11.74 $65.93 Closing $590.00 $113.90 $141.06 Low Low $8.42 $36.64 $29.00 $34.86 $15.32 $33.12 $20.10 $82.63 $35.11 $38.41 $32.12 $46.68 $21.90 $38.08 $35.53 $51.57 $48.52 $22.09 $68.65 $41.01 $56.69 $43.76 $28.86 $28.40 $10.30 $44.07 $427.99 $108.24 52-Week High High $53.75 $42.73 $56.82 $25.57 $43.21 $30.07 $48.50 $48.72 $40.78 $65.24 $26.80 $44.39 $44.87 $79.15 $68.60 $45.28 $59.19 $63.41 $13.10 $50.19 $35.55 $44.90 $12.45 $78.35 $650.00 $114.08 $147.00 $101.15 T H TD CU SU CM NA EIF SLF IPL FTS PPL KEY TRP BCE CSU SPB MFC ALA IMO BNS ENB WSP AQN EMA AEM BMO CTC.A Symbol Symbol Sun Life Financial Pembina Pipelines National Bank Manulife Keyera Corp Constellation Software InterPipeline Cdn Imperial Bk (CIBC) WSP Group Imperial Oil Canadian Utilities TransCanada Corp Hydro One Canadian Tire Telus Fortis Bk of Nova Scotia Exchange Income Corp Bk of Montreal TD Bank Enbridge BCE Inc Superior Plus Emera Canadian MoneySaver SUGGESTED CANADIAN DIVIDEND REINVESTMENT PLANS (DRIPs) TSX Companies AltaGas Suncor Energy TSX Companies Algonquin Power Agnico Eagle Mines CHART NOTE - Prices as of February 7th, 2017. Source: TD Waterhouse/Bloomberg LP. Stock prices change daily. Check for current prices. These Canadian companies listed on the TSX are our recommended you can reinvest all your dividends to purchase additional shares at no cost. Some DRIPS offer a discount so that are bought the average companies a DRIP. With the DRIP, market price. Some dividends are paid in US dollars and we have adjusted numbers ratios according to recent exchange rates. Div. 5yr gr: We have added the five-year dividend growth rate to our chart, information obtained from Bloomberg LP. Earnings are forward earnings estimates. Since our last update Algonquin, BCE and Canadian Utilities have raised their dividends. Yield = Dividend divided by current price. Payout ratio = dividend divided by earnings per share (EPS). The (estimated) earnings. If a company with low payment ratio experiences an earnings decline, it may continue to pay the same dividend. Or, at least, weather downturn without cutting dividend payout ratio is simply calculated by dividing the company’s dividend by its list. “watch” your on stock the place forward and vigilant very be should one Therefore, earnings. company’s the above or equal is payout dividend the that indicates 100% of ratio payout dividend high A dividend. taxpayer 2011 an Ontario For example, in income). rate on regular marginal tax divided by (100 - dividends) rate for (100 - marginal eligible shares: yield for of dividend for interest equivalent Calculation with ordinary income of $65,514 uses: (100 – 11.72) divided by (100 – 31.15) is approximately 1.2822. Therefore, a stock with a Canadian dividend yield of 5.0% has an equivalent interest return of 5.0 x 1.2822, which is approximately 6.41%.
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 39 TOP FUNDS 61.36 48.88 61.36 36.80 90.04 53.81 62.43 ($Mil) 237.27 345.75 237.27 558.68 269.82 239.31 932.24 663.36 705.82 239.31 743.24 701.37 692.41 349.42 287.02 139.82 237.27 460.93 765.47 139.82 267.61 540.24 143.24 540.24 209.85 220.37 1192.50 5728.05 1027.87 1531.16 1205.44 1531.16 1205.44 Total Assets ------1.95 2.00 1.15 0.85 0.90 1.00 1.85 1.25 0.90 1.85 0.75 1.85 1.25 1.00 0.70 1.00 1.00 0.50 0.80 1.00 1.00 0.85 2.00 1.00 1.40 1.00 0.85 2.00 0.85 0.85 0.85 Mgmt Fee ------MER 2.31 2.47 1.57 1.13 1.13 1.32 2.31 0.07 0.13 1.55 1.05 2.34 1.14 2.27 1.47 0.04 1.32 0.89 1.35 1.35 0.67 2.39 1.50 1.31 0.18 0.12 2.50 1.49 1.33 0.89 2.34 1.16 1.51 1.13 Mo 2.24 3.11 2.50 0.80 4.22 0.00 2.53 0.19 0.00 3.03 1.99 0.00 1.47 0.00 1.68 0.00 1.91 2.84 0.00 1.50 2.20 1.82 3.72 0.00 0.00 0.80 2.12 3.69 0.00 5.41 1.70 0.00 0.00 1.69 0.00 0.01 3.94 0.00 0.76 0.80 Yield 12 ------7.06 10.23 11.63 12.41 Return 15 Year (mth-end) ------8.90 7.74 7.16 6.39 7.26 6.18 7.25 6.08 4.10 4.65 8.21 14.94 (mth-end) 10 Year Return 14.21 12.12 11.42 10.63 18.58 13.06 11.74 11.34 10.47 17.60 12.77 11.51 11.31 10.37 17.24 12.69 11.37 10.52 10.02 16.19 12.62 11.10 10.08 23.98 13.11 12.53 11.01 22.75 12.74 11.01 21.22 12.62 10.97 19.99 12.60 10.83 18.59 12.00 10.63 12.00 (mth-end) 5 Year Return 5.47 7.60 9.27 8.21 9.23 9.70 9.92 5.02 8.20 8.03 8.48 6.14 6.65 7.69 7.65 8.58 9.99 9.52 7.75 8.99 5.59 11.17 11.03 12.15 10.30 13.93 12.52 11.53 10.94 10.86 10.78 11.17 20.47 19.13 12.98 10.64 11.48 10.53 12.14 10.19 (mth-end) 3 Year Return 19.98 16.12 21.68 15.50 26.25 19.68 19.55 20.45 25.01 25.50 15.10 21.16 20.46 16.56 24.79 19.24 27.40 17.25 14.78 23.99 31.86 23.25 17.28 37.73 23.07 19.13 14.68 36.37 12.63 31.33 29.44 19.80 24.94 28.08 21.86 17.39 26.23 24.02 21.43 21.85 (mth-end) 1 Year Return 0.50 0.73 0.04 0.33 1.86 0.65 0.62 0.01 0.99 0.27 0.56 1.76 0.66 0.91 3.38 3.30 1.08 1.03 0.72 0.68 -0.67 -1.95 -0.14 -1.18 -1.66 -0.09 -0.19 -1.66 -1.08 -1.86 -0.67 -0.82 -0.05 -0.74 -1.45 -0.83 -1.56 -0.73 -0.66 -1.93 (mth-end) YTD Return 7.96 5.33 8.60 3.99 6.84 8.21 5.71 1.89 9.01 3.80 9.65 1.91 4.34 6.21 8.02 7.74 4.63 9.38 8.36 8.86 9.26 6.11 5.56 4.83 2.52 7.84 6.83 8.09 8.26 8.68 -4.63 10.05 11.97 11.12 16.49 15.92 13.15 12.16 11.70 11.54 Return 6 Month (mth-end) 4.76 4.21 7.03 3.00 5.32 2.85 5.50 6.39 3.18 6.23 3.84 6.09 5.23 6.56 7.42 3.71 6.06 6.68 5.87 4.48 9.64 7.36 4.22 2.98 9.37 0.77 7.16 4.89 2.40 7.19 4.63 5.30 6.39 5.30 5.40 6.40 7.03 -0.61 -0.59 -0.29 Return 3 Month (mth-end) 0.50 0.04 0.33 1.86 0.65 0.62 0.01 0.99 0.27 0.56 1.76 0.66 0.91 3.38 3.30 1.08 1.03 0.72 0.68 0.73 -0.67 -1.95 -0.14 -1.18 -1.66 -0.09 -0.19 -1.66 -1.08 -1.86 -0.67 -0.82 -0.05 -0.74 -1.45 -0.83 -1.56 -0.73 -0.66 -1.93 Return 1 Month (mth-end) Fund Name CANADIAN DIVIDEND INCOME NEI Northwest Canadian Dividend I CI Can-Am Small Cap Corporate Class AT8 Scotia Canadian Dividend-PF Manulife Canadian Dividend Income L Beutel Goodman Canadian Dividend Class F CI Cambridge Canadian Dividend F Fidelity Greater Canada Class S8 PH&N Canadian Income Sr O Sentry Small/Mid Cap Income I STYLUS Value with Income VPI Canadian Equity Pool Ser F Fidelity Greater Canada Class S5 Dynamic Dividend Series F Fidelity Special Situations Series B Beutel Goodman Canadian Dividend Class D HSBC Dividend Institutional Trimark Canadian Endeavour Series F IA Clarington Strategic Equity Income F6 Sentry Small/Mid Cap Income F Trimark Can Plus Dividend Cl Series F PowerShares Canadian Dividend Index Cl F Exemplar Leaders Series F CANADIAN SMALL-MID CAP EQUITY Pender Small Cap Opportunities F CI Can-Am Small Cap Corporate Class F Dynamic Dividend Advantage Cl Ser I Sentry Growth and Income I Pender Small Cap Opportunities A Dynamic Real Estate & Infras Income F Leith Wheeler Canadian Dividend Series B CI Cambridge Canadian Growth Coms Cl F Quadrus Mid Cap Canada (GWLIM) N TD Dividend Growth Class - F CI Cambridge Canadian Growth Coms Cl AT6 Fidelity Greater Canada Sr F Meritas Monthly Div and Income Series F Fidelity Special Situations Series F Quadrus North American Specialty Cl N Quadrus Mac Cdn Large Cap Dividend N Fidelity Special Situations Class F CI Can-Am Small Cap Corporate Class E TOP FUNDS RANKED BY FIVE-YEAR RETURN AS OF FEBRUARY 9, 2017
40 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 TOP FUNDS 54.79 80.73 23.96 65.96 54.60 ($Mil) 314.80 437.86 351.91 970.66 315.33 219.47 614.45 170.43 379.26 1846.35 1501.82 6055.69 2411.76 4218.37 4218.37 Total Assets ------1.00 1.25 1.00 0.80 1.00 1.00 2.25 1.25 1.25 1.00 0.80 Mgmt Fee - - - - MER 1.27 1.38 1.36 2.01 0.92 0.04 0.10 1.81 0.04 0.11 3.03 1.72 3.02 0.12 1.95 0.85 Mo 0.87 0.00 0.20 0.00 0.00 2.04 1.23 0.00 1.40 0.00 0.00 1.24 1.44 0.00 0.62 0.81 1.35 0.77 0.00 0.24 Yield 12 ------6.40 3.27 2.46 6.33 4.73 12.35 Return 15 Year (mth-end) ------7.56 5.55 9.03 7.72 8.29 4.74 5.21 7.50 6.70 6.84 4.95 12.29 10.57 (mth-end) 10 Year Return 22.02 18.10 15.95 20.45 17.97 15.93 19.90 17.37 15.93 19.19 17.29 15.77 19.17 17.01 18.23 16.80 16.64 16.58 16.32 16.21 (mth-end) 5 Year Return 9.95 8.79 16.01 11.36 15.23 13.13 11.01 15.85 12.58 15.24 12.77 10.54 14.43 11.96 18.17 14.08 15.25 10.80 11.85 12.01 (mth-end) 3 Year Return 6.51 9.03 4.26 1.41 4.38 6.11 3.07 6.49 6.52 0.24 9.39 11.95 12.63 13.05 14.69 25.66 11.31 38.03 10.12 10.42 (mth-end) 1 Year Return 2.78 0.22 0.08 1.32 7.11 2.52 1.13 2.45 0.97 1.09 1.12 1.02 0.19 -0.60 -1.04 -0.53 -0.25 -0.14 -1.33 -0.21 (mth-end) YTD Return 6.04 4.24 1.39 5.34 0.05 1.78 4.57 5.18 4.09 3.97 0.23 2.68 5.09 0.10 4.76 6.99 11.29 17.47 12.36 10.24 Return 6 Month (mth-end) 0.88 0.85 5.30 1.70 3.61 9.80 0.68 2.05 1.97 2.91 1.85 1.90 3.01 2.47 2.36 0.02 1.77 3.71 -4.40 14.07 Return 3 Month (mth-end) 0.22 2.78 0.08 1.32 7.11 2.52 1.13 2.45 0.97 1.09 1.12 1.02 0.19 -0.60 -1.04 -0.53 -0.25 -0.14 -1.33 -0.21 Return 1 Month (mth-end) For information on the category definitions, please visit http://www.cifsc.org/en/index.php. Front load funds (Frnt) charge a fee to investors when units are For information on the category definitions, please visit http://www.cifsc.org/en/index.php. purchased; deferred load funds (Def) charge a fee when units are redeemed. Front loads may be reduced (in per cent terms) as th e size of the investment increases; a front load or deferred (FnDf). Others lengthens. Some funds have either between purchase and redemption may decrease as the time elapsed deferred loads eventually until fund, the hold you year each down go typically charges deferred these load, back-end a as known also charges sales Deferred (None). fee load no have average annual Year Return - The charges. n sales to avoid some as a way as well buy and hold, to an incentive investors charges give Deferred sales they reach zero. (Yr Return Year 1 income. interest or dividend any of reinvestment assumes It years. “n” last the over performed has fund the return of rate (annualized) compound ending DecYY) - An annual return is the fund or portfolio return, for any 12-month period, including reinvested distributions. Tax Efficiency Calculated by dividing the fund’s tax-adjusted return (pre-liquidation) by its pre-tax return, and can only be calculated when both pre-tax returns and tax-adjusted returns are positive. Distribution Frequency - The interval at which regular capital or income dividends are distributed to fund unitholders. Year end Quartiles quartiles (1 4) give the individual fund its position relative to all others in the fund type category. For example, if the fund’s quartile value is “1” for the Dec 2010 yearend, this means the fund’s rate of return for 12 months ending Dec 31, 2010 is in top 25% all funds its fund type category. Source - Morningstar PalTrak, Canada, (800) 531-4725, http://www.morningstar.ca. Fund Name GLOBAL EQUITY TD Entertainment & Comm - F CI Black Creek Global Leaders Class F Templeton Growth Ltd O ROMC Salary Series Sun Life MFS Global Value Series I Quadrus US and Intl Equity Class N EdgePoint Glbl Port (non-HST) Sr F(N) Mawer Global Equity Series O Dynamic Power Global Growth Class Sr I Renaissance Global Science & Tech Cl F Capital Group Global Equity-Canada I Marquis Institutional Global Eq Port I CIBC Global Technology Fiera Capital Global Equity F HSBC Global Equity Advisor PH&N Global Equity Sr O Scotia Private Global Equity Pool Stone & Co Flagship Global Growth F Capital Group Global Equity-Canada H Russell Inv Global Equity Pool Sr F CHART NOTES TOP FUNDS RANKED BY FIVE-YEAR RETURN AS OF FEBRUARY 9, 2017
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MARCH/APRIL 2017 z 41 TOP EXCHANGE TRADED FUNDS RANKED BY FIVE-YEAR RETURNS AS OF FEBRUARY 9, 2017 Specialty ETFs Fund Name Ticker Mkt Tot Return Mkt Tot Ret Mkt Tot Mkt Tot Ret Mkt Tot Ret Mkt Tot Ret Mkt Tot Ret urn YTD 1 Mo Ret 3 Mo 12 Mo 3 Yr 5 Yr Since Incept (Current) (Current) (Current) (Current) (Current) (Current) (Current) BetaPro NASDAQ-100® 2x Daily Bull ETF HQU 10.44 10.44 12.80 38.76 24.34 30.68 -
BetaPro S&P/TSX Cap Fncl 2xDlyBull ETF HFU 3.81 3.81 22.09 58.54 21.17 25.84 -
BetaPro S&P 500® 2x Daily Bull ETF HSU 3.26 3.26 14.61 36.87 17.06 24.48 -
iShares S&P/TSX Capped Cnsmr Stapl XST -1.48 -1.48 -3.99 4.72 19.72 21.17 18.47
Horizons S&P 500 ETF HXS -1.41 -1.41 4.33 11.08 16.22 19.49 17.28
iShares US Fundamental Comm CLU.C -2.52 -2.52 6.31 14.87 15.06 19.44 17.93
iShares US Fundamental Adv CLU.B 0.01 0.01 6.96 17.37 14.69 18.84 17.32
BMO Eq Weight US Banks Hedged to CAD ETF ZUB 0.66 0.66 26.27 50.47 11.89 18.28 -
BMO Eq Wght US HlthCare Hdgd to CAD ETF ZUH 3.86 3.86 6.26 9.27 11.18 18.16 -
iShares S&P/TSX Capped Info Tech XIT 0.51 0.51 1.72 9.58 14.54 17.60 1.78
PowerShares QQQ ETF QQC.F 4.88 4.88 5.99 20.36 13.79 16.66 16.76
BMO NASDAQ 100 Equity Hedged to CAD ETF ZQQ 4.86 4.86 6.32 20.20 14.01 16.62 16.31
iShares NASDAQ 100 CAD-Hdg XQQ 4.71 4.71 5.99 19.84 13.60 16.48 14.81
iShares Equal Weight Banc & Lifeco Comm CEW 2.47 2.47 13.51 32.44 13.22 16.45 8.82
iShares Global Water Comm CWW 0.69 0.69 -0.47 5.03 10.44 15.94 5.72
iShares Japan Fundamental (CAD-Hdg) Adv CJP.A -0.53 -0.53 17.96 14.34 8.88 15.91 -3.04
BMO Low Volatility Canadian Equity ETF ZLB 0.32 0.32 1.17 12.12 13.70 15.64 15.28
iShares Japan Fundamental (CAD-Hdg) Comm CJP 0.94 0.94 11.92 6.20 9.28 15.49 -2.63
iShares MSCI World XWD -0.56 -0.56 3.10 8.51 11.38 15.36 12.24
iShares Global Water Adv CWW.A -0.03 -0.03 -2.03 3.51 9.30 15.18 4.81
iShares Global Healthcare (CAD-Hedged) XHC 1.22 1.22 4.30 2.84 7.88 14.95 14.11
BMO Global Infrastructure ETF ZGI -1.62 -1.62 -2.77 12.45 11.21 14.83 15.32
iShares Equal Weight Banc & Lifeco Adv CEW.A 1.47 1.47 12.99 32.15 12.29 14.58 7.87
First Asset TechGntsCovCall ETF CADHComm TXF 3.99 3.99 5.95 34.77 12.58 14.20 13.71
iShares S&P/TSX Capped Financials XFN 2.19 2.19 10.94 28.01 12.15 14.13 9.82
BMO S&P/TSX Equal Weight Banks ETF ZEB 2.83 2.83 12.99 35.97 14.58 14.04 12.71
BMO S&P 500 Hedged to CAD ETF ZUE 1.81 1.81 7.41 19.17 10.17 13.67 -
iShares Core S&P 500 (CAD-Hedged) XSP 1.72 1.72 7.46 19.19 10.25 13.62 2.92
PowerShares FTSE RAFI US Fundamental ETF PXU.F 0.23 0.23 9.51 24.56 9.16 13.58 13.53
iShares US Dividend Growers(CAD-Hdg)Comm CUD 0.87 0.87 7.21 21.76 11.17 13.57 14.66
Vanguard US Total Market ETF CAD-H VUS 1.83 1.83 8.09 20.87 9.42 13.40 13.85
iShares US Fundamental (CAD-Hedged) Comm CLU 0.34 0.34 8.94 22.89 9.01 13.36 5.57
First Asset TechGntsCovCall ETF CADHAdv TXF.A 1.60 1.60 3.86 34.11 11.58 12.96 -
Horizons Active Global Dividend ETF Comm HAZ -1.86 -1.86 2.90 3.63 12.46 12.75 -
iShares Global Real Estate Comm CGR -2.06 -2.06 -2.03 -0.54 11.25 12.72 6.84
PowerShares S&P 500 Low Volatility ETF ULV.F 0.33 0.33 3.45 11.63 10.89 12.69 7.06
iShares US Small Cap (CAD-Hedged) XSU 0.24 0.24 14.37 32.46 7.49 12.69 4.93
BMO Covered Call Canadian Banks ETF ZWB 2.65 2.65 9.49 30.63 12.71 12.14 10.01
BetaPro Crude Oil -2x Daily Bear ETF HOD 5.01 5.01 -21.82 -58.68 28.91 12.08 -
BetaPro S&P 500 VIX ST Fut DlyInvs ETF HVI 29.30 29.30 62.80 190.01 24.56 - - ©2017 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, (2) may include, or be derived from, account information provided by your financial advisor which cannot be verified by Morningstar, (3) may not be copied or redistributed,(4) do not constitute investment advice offered by Morningstar, (5)are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supple-mental sales literature. If applicable it must be preceded or accompanied by a prospectus, or equivalent,and disclosure statement.
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CANADIAN CANADIANMONEYSAVER.CA For a one-time fee of $159 plus $7.95 GST, we will shop the local dealerships, find the exact vehicle you want, and use our experience and industry knowledge to negotiate the lowest price for you. All you have to do is tell us the type of vehicle and op- tions you want, whether it’s a purchase or lease, the geographic MIndependent FinancialONEY Advice For Everyday Use - Since 1981 SAVER area you want us to search, and we do the work for you. Once you approve the deal, we will arrange for you to go to the dealership to sign the paperwork and pick up your new vehicle. Give as a Gift? When you use our service, we guarantee that we will get your vehicle at a lower price than you can obtain on your own, or we If your mailing address is printed BELOW this box, will refund our fee. Dealfinder can offer the guaranteed lowest price because we know what the vehicles cost the dealer and your membership is about to expire. we only deal with fleet managers and sales managers who offer Renew today and assure continuous service. us a volume discount. Use the form on the reverse side or the One of the questions most frequently asked by our customers is whether the warranty (or service) work has to be done by the renewal envelope bound inside this issue to renew. dealership the vehicle was obtained from. The answer is no. The No other renewal notice is sent. warranty (service) work can be performed by the dealership of your choice. Most people simply take the vehicle to the dealer Give as a gift and share the wealth of that is conveniently located near their home or office. financial knowledge and expert advice DEALFINDER BENEFITS with a friend or family member. ✔ shops the local dealerships for your vehicle; ✔ guarantees you the lowest price; ✔ eliminates hassles, bargaining and pressure; and You can also renew or order online at ✔ one-year MoneySaver membership (new or gift) with each payment. www.canadianmoneysaver.ca TESTIMONIALS
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