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DIVIDENDS-2018-01-Hidden Taxes Dividend Newsletter Vaughn Warrington CFP, FMA / 905-309-9990 2018-01 Hidden Taxes One aspect I love about my career is the constant flow of information and the changes that occur, sometimes daily. Honestly, I wish that some of the daily stuff would be more like weekly; but all in all it makes life very interesting. The US came off a great year for equities as represented by the S&P500 index, up +21.83%. As we finish the first month of January, it was up +5.7% already. The Canadian index, represented by the TSX Composite was negative -1.6%. This all in the face of oil climbing into US$64/barrel. The reality of the per barrel price is not really true for Canadian oil as it is so expensive to transport said oil (not enough pipelines), so firms in Canada are seeing US$27.70/barrel for Western Canadian Select - March contracts. I have done a 50% re-write to my 7 year old Dividends Rule ebook, using up to date data, revised charts and commentary. All can be found on my website or by clicking here. The really big news...Dividend growing companies continue to rule the roost. I have updated the international side of the book as well as the incorporation of “Alternatives” into the discussion. Take a peak and at least read up to the first 5 rules. I think you will find it insightful. Staying on this US domination, I focus on the Hidden Taxes and their impacts upon companies in the article below. According to Denis Leary (comedian, actor and author) TWITABAN Definition: Kills the desire to tweet. Instead, you actually read books and gain interesting and true historical information that makes you smarter. Hidden Taxes In a few months we will get to see how much we owe in income taxes for 2017. If you are like Jennifer and I, we typically think about how many employees we could hire vs the income taxes we pay. I guess we feel we could apply the money in more effective ways, as we hate to see waste and our income tax go to pay the interest on deficits. If I may remind you, I have a strategy posted on my website on how to pay down your mortgage faster (click here). Perhaps governments could learn something from such an approach. As mentioned in previous enewsletters about the US, Trump is what he is, however I am focused on the fiscal plans that will help business. To this end, the corporate tax rates in the US have been lowered dramatically facilitating businesses to grow their operations within their borders. Further, the tax relief to repatriate funds that US Corporations hoard round the world, has also arrived. One of the first and biggest examples we have is APPLE. Apple is bringing back $245 Billion, yep starts with a “B”, that they had trapped in other countries from their global revenues. They have done so as tax relief was provided by Trump’s legislations. Dividend Newsletter Vaughn Warrington CFP, FMA / 905-309-9990 2018-01 Hidden Taxes So why is this good for Apple and for the US economy and for US companies and their employees? The US government receives immediate taxation revenue on funds that otherwise were going to remain overseas. They also gain the opportunity for corporations to use those funds for greater business investment (more on this later). Apple made a commitment to hire 20,000 new employees as part of this repatriation of dough, and to build another campus for employees. Also they will invest $30 Billion in the US. I dare to say, this all sounds very positive for all concerned, especially those who live in the US and those of us who invest in the US. So the previous high level of taxation on repatriated dollars, was not really hidden, however taking the veil off it and introducing lower rates, even in only one example, Apple, shows that it really was hidden taxation. We have already begun to here stories of companies rewarding their employees with immediate bonuses from the reduced tax rates in the US. If you watched the State of the Union, they used an example of a small manufacturer in Ohio, who did this, added 14 more employees and expanded into the building next door. The previous higher taxation hurt expansion, and exposing a lower tax rate is already showing it’s benefits. So now to some really hidden taxes. They are the burden that government places upon companies, “RedTape”. If the cost of dealing with RedTape is high, companies have to offset that cost in some way. They either increase the price of the goods/services they offer (if the market will allow), reduce their expenses (perhaps hire fewer employees or layoff some), for examples. So RedTape is like a hidden tax that hurts the competitiveness of companies and their employees. It is estimated that in the US this costs companies some $1.9 Trillion dollars annually. Compare that to what the corporate tax cuts in the US will not receive in annual revenue of $262 Billion. In reality the hidden tax is far more burdensome than the lost revenue the US government will receive. If you can reduce the taxation of RedTape, companies will have more money to spend on their competitiveness. This is another area receiving more exposure, as the US is removing 22 burdensome regulations for every new one. I would rather have my money in a location that is making a dramatic reduction in hidden taxation than a country that is not. This moves us right into business investment. What we are referring to, is the percentage year over year that companies reinvest back into their businesses by way of machinery, equipment, training, etc. Over the past 30 years, Canada has seen this rate drop from 5% to 3%. In 2017 the US saw this climb to 16%! US companies are spending more on themselves, by the tune of 500%+, over Canadian companies. The opportunity for these US companies to become more efficient and profitable is obvious. As we are in the last stage of this long US Bull market, I still see opportunity for investment in US operations. Be it either directly via US companies that meet my screening criteria, or Canadian companies that receive substantial income from US operations. As can be seen, Canada and the US were on the same path overall thru 2007. Then the dispersion on debt to income between the two countries began. This is brand new territory and no one can profess to state what will happen next. I would suggest, this is not good for the Canadian consumer nor Canada's economy over the long term. .
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