Canadian Money Saver Jan 2007

CANADIANMONEYSAVER.
CA
January 2007
Why Im Sticking With Income Trusts

> > > > > > An Economic U-Turn? Five Stingy Stocks for 2007 Board Elections Who to Vote For and Why Portfolio Turnover Interest-Bearing Preferreds Achieving Financial Comfort in Todays World
$3.95
PM40035485 R09904
Join MoneySaver in Toronto for an Investment Conference on January 27, 2007
FOUNDER/EDITOR-IN-CHIEF
Dale Ennis
JANUARY 2007 www.canadianmoneysaver.ca
CONTRIBUTING EDITORS
Special Features
An Economic U-Turn? John Stephenson .................................. 5 New Income Trust Tax Lands Me in Hot Water Derek Foster ........................................ 7 Emerging Market Investing Part 2 Richard Kang ....................................... 8 Understanding the Benchmarks Leonard Goodall .................................. 11 Five Stingy Stocks for 2007 Norman Rothery .................................. 13 Board Elections Who to Vote For and Why George Gutowski .................................. 16 Portfolio Construction Financial Services Bruce Campbell .................................. 17 Why Im Sticking With Income Trusts David Stanley .....................................19 Portfolio Turnover Ken Kivenko ....................................... 21 Interest-Bearing Preferreds James Hymas .....................................23 Achieving Financial Comfort in Todays World Francis DAndrade ................................26 A Full Suite of ETF Products John De Goey .....................................30 Personal File Management Part Two Brenda MacDonald ............................... 31 RRIFs The Basics Kirk Polson ......................................... 32 Learning about Life Patrick Longhurst ................................34 Planning For The Disabled Ed Arbuckle ........................................ 36
Ed Arbuckle, Robert Barney, Jeff Buckstein, Bruce Campbell, John De Goey, Hedley Dimock, Frank Duck, George Fisher, Robert Floyd, Derek Foster, Benj Gallander, Johanne Gauthier, Robert Gibb, Leonard Goodall, George Gutowski, Dan Hallett, James Hymas, Richard Kang, Robert Keats, Ken Kivenko, Alex Kobelak, Patrick Longhurst, Brenda MacDonald, Brian Quinlan, Wynn Quon, Eileen Reppenhagen, Norm Rothery, David Stanley, John Stephenson, Ted Warburton, Carolyn Williams, Carl Wolfe, Becky Wong
CUSTOMER SERVICE - Betty Ennis MEMBERSHIP RATES - (Includes Cdn MoneySaver) Print Edition: Canada - 1 year (9 issues) @ $21.15(includes GST) / NB, NL & NS residents @ $22.74 (includes HST) Outside Canada: 1year print @ C$75 Online Edition Anywhere:1 year @ C$21.15 PRIVACY POLICY - CMS may make its members mailing list or e-mail addresses available to carefully screened companies or organizations offering products or services that may be of interest to you. If you prefer not to receive these offers, send us your mailing label with Do Not Rent written on it. Canadian MoneySaver (CMS) is published by The Canadian Money Saver Inc. P Box 370, Bath, .O. Ontario K0H 1G0 Tel: (613) 352-7448 [ 9:00 am4:30 pm ET], Fax: (613) 352-7700 [24 hours]. Website: http://www.canadianmoneysaver.ca E-mail: moneyinfo@canadianmoneysaver.ca Canadian MoneySaver publishes monthly with three double issues (July/Aug, Nov/Dec and March/ April). Canadian MoneySaver is an independent, totally membership-funded magazine. Canadian MoneySaver is not connected with any bank, brokerage or other financial institution. The information contained in Canadian MoneySaver is 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 The Canadian Money Saver Inc. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any securities or commodities. Canadian MoneySaver is distributed with the explicit understanding that Canadian MoneySaver, its publisher or writers cannot be held responsible for errors or omissions. Shareholders of The Canadian Money Saver Inc, editors and contributors may at times have positions in mentioned investments/securities. Copyright 2007. All rights reserved. No reproduction, transmission or publication of any of the contents of Canadian MoneySaver is permitted without the express prior consent of the copyright owner. To obtain permission to use any part of Canadian MoneySaver, contact Dale Ennis. Canadian MoneySaver is a Registered Canadian Trade Mark of The Canadian Money Saver Inc. Printed in Canada ISSN: 0713-3286 We acknowledge the financial support of the Government of Canada through the Publications Assistance Program (PAP) toward our mailing costs. PAP Registration: 09904. Canada Post Publication No. 40035485 JANUARY 2007, VOLUME 26, NUMBER 4
Regular Features
ShareClubs .......................................... 4 MoneyDigest ....................................... 14 DRIPs with SPPs .................................. 18 Top Funds .......................................... 28 MoneySaver Events .............................. 37 San Miguel Lifestyle Conference .............38 Ask the Experts ................................... 39 Investing for Your Future ...................... 41 Member Services .................................. 43
ShareClubs
You may 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 are meant to share investing information only. Contact MoneySaver and volunteer to start a ShareClub in your area. When ShareClubs are filled, they are delisted.
VOLUNTEER Ontario Ross Dineen Don Robb Bill Burgess Mike Koktan Mike Jenkinson David Munro Peggy Whitta Ken Carey David Parker Paul Drummond Linda Sopoco Delfin Robert Paquette Jennifer Young Dominic Pun Tom Loftus Robert MacKenzie Michael Higgs Paul Mintha John Mills Jeff Danby Gerry Roy Larrry/Susan Marrier Peter Genesi Alliston Bolton/Caledon Brantford Brockville Guelph Hamilton Kenora Kingston London Mitchell Mississauga Niagara Falls North York I North York II Oshawa Ottawa Peterborough Port Hope Scarborough St. George Sudbury Thunder Bay Wasaga Beach 705-434-2143 905-880-5353 519-759-7065 613-342-5474 519-821-3415 905-690-3858 807-548-4387 613-548-7923 519-657-2505 519-348-9724 905-858-5555 905-357-3919 416-227-1954 416-755-6291 905-725-1979 613-726-3310 705-760-9151 905-885-8659 416-267-7993 519-753-7414 705-969-6468 807-768-5321 705-429-2904 REGION TELEPHONE (PM)
Sharing with You
Manitoba, Saskatchewan, Alberta, BC, NT Fred Chernoff Kris Widla William Hall Joan Kumlin Calvert Lum Bob Dacko Chuck Page David Harris John Scholtz Ed Dzuba Pat Lilly Todd Ogryzlo Garry Sutton Robert Gibb Russell Page Leslie Wilson Winnipeg I Winnipeg II Fort McMurray Calgary SW St Albert/ N. Edmonton Armstrong Courtenay/Comox Kelowna Port Moody/Coquitlam Mid-Island Sunshine Coast Downtown Vancouver Delta/Ladner/Tsawwassen Victoria Victoria/Saanich Yellowknife 204-488-7652 204-261-7902 780-791-2579 403-254-4760 780-458-5999 250-546-2003 250-338-5235 250-862-5990 604-469-5959 250-752-2115 604-885-7299 778-329-6441 604-943-4291 250-383-7075 250-479-1135 867-873-8256
he first well-known stock market disaster was probably the tulip bulb mania of the 1600s. Later in that century Englishmen were investing in oil from sunflower seeds. And on it went. More recently we have witnessed other investment failures such as the Multiple Unit Resident Buildings (MURBs), Bre X, the dotcom bust, Labour Sponsored Investment Funds (LSIFs), art flip deals and alternative products like hedge funds. The income trust meltdown triggered my thinking about such investor issues. (I admit owning and holding one income trust [Great Lakes Hydro Income Fund], which is in our companys securities account. It was a good value buy before the Halloween announcement and I still consider it a good investment for all the reasons why I initially bought it.) How can we avoid financial disasters? For me, I seek constant reminders to support my investment style. I continue to read books, for example, such as The Little Book of Value Investing (Wiley, $23.99) to keep me on target. Christopher Browne, the author, is the managing director of Tweedy, Browne Company LLC, one of the most highly regarded investment firms in North America. This statement from Browne is indicative of his reasoning: The big problem with emerging markets: they never quite emerge. One day, its Russia, the next Mexico. But invariably that latest hot market in the developing world turns cold, leaving investors shaking their heads. Again this year I resolve to buy value at the best price. This annual reminder is my firewall so I ignore all the hype of the media and the promoters with their bogus figures, which too many investors bite on every time. As more new structured/managed products are unveiled daily, their complexity and glorious promises build. All too often the reality is that they will leave you with little chance for real growth. But for those of you who are more adventuresome than me, you may be attracted to non-principal protected notes (NPPNs), constant proportion debt obligations (CPDOs), reverse convertibles and the always attractive donation schemes! Have a prosperous 2007. Dale Ennis
JANUARY 2007
4 Canadian MoneySaver
http://www.canadianmoneysaver.ca
The Skeptical Investor
An Economic U-Turn?
John Stephenson
hings seem to be going along swimmingly. Well, if you can forget about the latest income trust meltdown. But in the weeks since the announcement, the S&P/TSX index is actually up 1.22%. Commodity prices remain relatively strong and the outlook for the Canadian dollar is favorable. So, why worry? Lately, there has been a lot of concern about an economic slowdown in the United States. Commodity prices slid hard as investors worried that a U.S. housing crash would deflate the economy and take with it the strong global demand that commodities have been enjoying. With as much as 50% of U.S. consumer spending growth in recent years dependent on home equity withdrawals (using your house as an ATM), a crash in house prices would put a serious pinch in the purchasing punch that consumers are able to deliver. With consumption making up some 72 percent of U.S. GDP, falling house prices could create a nightmare scenario for the economy. But is the market right? Perhaps. The news isnt very good. House prices, which represent some 48.5% of U.S. household wealth, appear to be sliding with no end in sight. In some parts of the counFigure 1: With New Home Sales Falling Builder Sentiment Has Plunged
Figure 2: U.S. Leading Economic Indicators Turning Negative
Source: NBER
Source: Bloomberg
try, the inventory of homes for sale (number of homes for sale divided by average monthly sales) is over seven months long. This is translating into lower house prices and poor results for the nations homebuilders. With U.S. housing starts down some 19.8 percent yearover-year, builders and investors are beginning to fret. While residential construction accounts for only 5.5 percent of the U.S. GDP, it is the effect on pocketbook economics that has analysts worried. Not only has sentiment turned negative for builders, but also, recent data suggest that the median house price has begun to tumble. With consumption so beholden on borrowing against inflated house prices, can a slowing economy be far behind? Signs of a broader economic slowdown are everywhere. Manufacturers are reporting weaker numbers and leading economic indicators (new orders, yield curve, building permits, etc.) have turned negative for the first time in five years. With the U.S. economy decidedly slowing, can a global recession be far behind? No. For starters, growth in the rest of the world is not nearly as dependent on the U.S. consumer as you might think. China, Russia and much of the Middle East are all
JANUARY 2007 5
Canadian MoneySaver
growing at a rapid pace. Europe, and even Japan, are starting to show some growth and very little, if any, of it is dependent on the U.S. China, which has been growing at more than 10 percent a year, produced some 6.5 million cars last year without exporting a single car to the U.S. In fact, exports to the U.S. accounted for only 8 percent of Chinas GDP and American markets mean even less for other rapidly growing economies such as India and Russia. What all this means is that world GDP could clock in at a healthy clip of 4.5 percent even with the U.S. economy wheezing away. This is good news for commodity players who will see higher base metals and oil and gas prices in the years ahead as global purchasing continues unabated. Commodity pricing is influenced by many factors, but in the end, the only factor that really matters for higher prices is strong demand and struggling supply. In an increasingly global world, demand will come from Asia, not America. But the news may not be all that bad at home. With a slowdown looming, the U.S. Federal Reserve (U.S. central bank) will have little choice but to cut interest rates to spur growth. Thats good news for the stock market and investors alike. Not only that, but wage gains are up some 8 percent this year, as stock options and bonuses have started to kick in. While consumption is likely to weaken if U.S. house prices continue their slide, it should still keep pace with income growth. If the U.S. dollar weakens in the face of lower interest rates, the competitive positioning of U.S. firms could improve (exports are cheaper) which should improve the balance sheets of corporate America. Much of corporate America cut back drastically on spending after the technology bubble burst and is flush with cash, which should allow many companies to weather an eventual economic storm. While the economy is likely to slow in 2007, it may not crashgood news for investors and consumers alike. But falling interest rates is great news for stocks, particularly interest-rate sensitive stocks. In a declining rate environment, companies that have stable long-term contracts or regulated business models tend to soar. Even in slow economic times, consumers are still going to need heat, food and shelter. Consumer staples, utilities and financials are all likely winners if the faltering U.S. housing market causes the Federal Reserve to slash interest rates to prevent a hard landing for the economy. For Canadian investors the story is mixed. If the U.S. slows, this could harm our exports. But a slowing American economy could mean that the Bank of Canada has no choice but to lower interest rates to keep our currency from rising too fast against the greenback. While Western Canada has been enjoying the upswing from a global commodities
Figure 3 Falling Interest Rates A Boon For Stock Markets
Source: Scotia Capital Inc.
boom, central Canada has been suffering with the effects of the high dollar, which has put a crimp in our exports. Investors looking to profit from a U.S. slowdown should consider allocating a greater proportion of their investment dollars toward utilities and other interest-rate sensitive stocks as interest rates are more likely to fall than rise in the months and years ahead. Investors with a longer time horizon can use the current commodity price weakness, particularly in energy, as an opportunity to pick up some great quality oil and gas names that are trading at a discount. John Stephenson, MBA, CFA, FRM, Founder of Report on Money.com, Publisher of Money Focus, Senior VicePresident and Portfolio Manager, First Asset Investment Management Inc., 95 Wellington Street W, Suite 1400, Toronto, ON, M5J 2N7 (416) 640-3283 or (877) 6421289, jstephenson@firstassetfunds.com
MoneyTips
SCHEDULE OF KEY INTEREST RATE ANNOUNCEMENTS AND PUBLICATIONS FOR 2007
January 16 - Interest rate announcement January 18 - Monetary Policy Report Update March 6 - Interest rate announcement April 24 - Interest rate announcement April 26 - Monetary Policy Report May 29 - Interest rate announcement July 10 - Interest rate announcement July 12 - Monetary Policy Report Update September 5 - Interest rate announcement October 16 - Interest rate announcement October 18 - Monetary Policy Report December 4 - Interest rate announcement
JANUARY 2007
Stop Working
New Income Trust Tax Lands Me in Hot Water

Derek Foster
n October 31, income trust investors got a trick instead of a treat from the federal government. In spite of a promise not to tax income trusts, a new taxation plan was announced. The next day, many trusts market prices plummeted between 15-20%. I retired at 34 by buying steady dividend-paying, bluechip stocks with a very healthy dose of high-yielding income trusts. This surprise announcement wiped over $30,000 off my portfolio in a single day. However, with my strategy, I dont focus on my portfolio value as I know it will go up and down like a yo-yo. I focus on the cash being paid to me on a regular basisthis is the income I need to fund my very early retirement. With the announcement, the ability of trusts to pay their generous distributions has been reduced. Starting in 2011 (existing trusts have a four-year grace period), they will pay taxes, which will reduce the cash they have available to send to unit holders. The tax rate at that time will be 31.5% (from what Ive read), so almost a third less cash will be available. How did I react to all this? With lightning speed, I leapt to action and did...absolutely nothing. There was no chance for anyone to sell before the plunge. The underlying fundamentals of the income trust model had changed, but these changes had already affected market prices. There was no point in selling. I called my MP, the PMO, and Jim Flahertys office, and my opinions were duly recorded, but Im not holding my breath waiting for action. The rest of the day was spent taste-testing my kids Halloween treats to make sure they were totally safe for their consumption as I explained it to them. Then what? The next step was to examine the universe of trusts to see if I could perhaps find some oversold gems available through all this. So I went to the Dominion Bond Rating Service website (www.dbrs.com) and clicked on Income Funds. I recorded all the names of trusts that had a stability rating of STA-1 or STA-2 (the higher the number, the more stable the distributions are according to DBRS). I found some familiar namesmany trusts I own and menCanadian MoneySaver
tion in my book, STOP WORKING: Heres How You Can! But some prices still seemed very pricey. For example, Pembina Pipelines had fallen from almost $18/unit to around $13/unit (a pretty sizeable retreat). But I had bought it for $7.75 during the tech bubble, so I was loathe to pay almost twice that price for more units. On I went until I fell into hot water, or more precisely waterheaters. For anyone who is familiar with the strategy I used to retire at 34, theyll see the appeal of this type of business right away. Simple, a recession-proof business with no fancy technological breakthroughs coming that can confuse me (which isnt too hard on most days). Regardless of the season, economy, fashion trends, whatever, people will use hot water. I had a 15-year-old heater burst a few years ago and I just called the company, and they replaced it right away. Simple. I examined Consumers Waterheater Income Fund a little closer. The cost of a waterheater is about 40 cents a day, so its not a huge expense for consumers. The number of waterheater rentals has increased over the last 16 years at a rate of 4%/year, and they service areas of growing population mostly in southern Ontario. So the number of customers should keep growing. They should also be able to raise rental prices by the rate of inflation over time. Over the last few years, the distributions were $1.05 in 2003, $1.067 in 2004, $1.12 in 2005, and $1.19 projected for 2006. In 2007, if monthly distributions remain constant, distributions will be $1.23. Theres been slow but steady growth. Meanwhile, the unit price fell from around $16 to around $12 after the announcement. I bought some units on November 3 at $12.65. Any time one buys stocks or income trusts, there are always risks. On many occasions Ive single handedly proven the second part of Einsteins assertion when he said, The only two infinite things are the universe and human stupidity. Im not a professional stock picker or analyst, but here was my thinking on this. With $1.23 in distributions and a unit price of $12.65, my immediate yield will be 9.7%, taxed like interest income. If I assume prices rise 2%/year, and volume also rises
JANUARY 2007 7
at 2%/year (half the historical rate of growth), then I can assume the trust will earn roughly 4% more each year for the next 4 years. If they also raise the distribution by that amount, then the payout will grow from $1.23 now, to $1.44 by 2011 (when the announced taxes kick in). Then tax will be 31.5% (from what I read), so a 31.5% reduction is (1.44 x .685 = 99 cents). With approximately a 99 cent annual distribution in 2011, the yield on my purchase price will be 7.8%. Now since the government wants to level the playing field between income trusts and corporations, I would expect this new reduced distribution to receive favourable tax treatment like dividends currently do (with the dividend tax credit). With this investment, I expect to receive a regularly taxed 9.8% yield which should rise to 11.5% by 2011 (when the new taxes kick in). Then I will get a tax-advantaged 7.8% yield which should rise slightly faster than the rate of infla-
tion. The unit price should also be supported at this lower level as the new taxation rules have already been announced. With the first of the baby boomers hitting 60 this year, I feel the demand for yield will not disappear as people will shift money from more speculative stocks into stable cash generators that are boring but stable. Although I am not happy at all about the governments announcement, Im hoping to find a silver lining. I made my decision with imperfect information and I could be proven wrong, but thats the nature of investinglow risk is never no risk. Derek Foster, Author of Stop Working: Heres How You Can, Box 29131, 3500 Fallowfield Rd, Unit 3, Nepean, ON, K2J 4A0 (888) 686-7867 or (613) 823-2143, stopworking34@yahoo.ca. Dereks book is discounted for members at $14.95.
Building A Better Portfolio
Emerging Market Investing Part 2

Richard Kang
ast month I covered emerging market investing in broad terms. The decision as to whether emerging market (EM) investments should be considered a long-term hold or not is dependent on each investors risk tolerance. Because of its inherent volatility, I would tend to see EM positions as non-core holdings and thus I would not apply a truly buy-and-hold mentality. For investors with a truly longterm profile (such as an investor in their 20s investing in an RSP), and with little resources to continually study the art/ science of investing, I would then argue that buying and holding a broad emerging market fund makes sense. As a market participant who prefers the use of exchangetraded funds (ETFs), I will simply comment here that for many investors who want to buy the emerging markets in one trade, one of the most common means is by way of the iShares MSCI Emerging Markets Index Fund (ticker: EEM) traded in the U.S. However, for more sophisticated investors, I would hope to see in the near future, emerging
market ETFs that have various regional exposures to emerging markets. Thus, I would like to see an ETF for Central/ Eastern Europe, another for southeast Asia and another for the Mideast/Africa. An ETF already exists for Latin America (ticker: ILF). Having a strategic asset allocation plan to emerging markets using this sort of regional context is ideal especially for larger portfolios. Although ETFs for all these regions dont exist, closed-end funds traded in the U.S. may be available. Getting back to basics, and with what we know to be currently available, I focus here on two ETFs and two mutual funds that give most investors the means to have broad emerging market exposure. Even holding any two of these positions give added broad international exposure that is more than enough to augment international equity positions as found in mutual funds or ETFs, such as the iShares CDN MSCI EAFE Index Fund (XIN).
JANUARY 2007
Vanguard Emerging Markets ETF

Emerging markets have been simply hot over the past few years. Your investment in the broad emerging markets would have doubled from early 2003 to early 2004. It would have doubled again from the summer of 2004 to early 2006. The problem is that with significant returns come significant risks. Over the past three years, emerging markets have experienced drawdowns of roughly -18%, -13% and -26%. These price drops usually occur quickly within a two-month period, the last one occurring over a 4-week period in May/June 2006. But consider this: although emerging markets were down roughly 26% from the peak in early May to the bottom in mid-June 2006, all of the losses were erased when the markets rose thereafter. Specifically, new highs in VWO were hit in the first week of December although at the time of writing there has been some pullback since hitting those new highs. Clearly, in the current environment patient intermediate-term investors are being rewarded. Still, for many investors, a 26% hit is just not acceptable and thus tactical trading may be deemed appropriate. This does not just apply for emerging markets. As I mentioned in part one of this article last month, the Nasdaq and the TSX Composite experienced massive drawdowns in 20002002, both far worse than a drop of 26%. Many investors may be aware of the iShares ETF for emerging markets (ticker: EEM). Note, however, that Vanguard recently changed the mandate for its emerging market ETF (ticker: VWO), so that it now tracks the MSCI Emerging Market Index just as EEM does. Thus theyre the same fund. There are only two significant differences. One: EEM started trading in February 2003, VWO in April 2005. Two: EEM has a 75bps MER. VWO has a 30bps MER. The math to compare costs is simple and my recommendation is to choose VWO. There is an important rule of thumb here: For any iShares ETF you are considering to hold, take a look to see if Vanguard has something similar because their fees are often much lower.
EPP has roughly two-thirds in Australia, about 20% in Hong Kong, 10% in Singapore and 2% in New Zealand. With nearly a quarter of the fund in banks, you have a decent value tilt that is needed in this relatively low-yield world. Its next largest sector weightings are in materials and real estate, each with roughly 16%. To me, this fund is a good holding because it has almost no overlap with VWO, yet has close economic ties to China simply due to geography. With an MER of just 18bps, Id like to see Vanguard revise its mandate so it, too, tracks the MSCI Pacific ex-Japan Index. Note EPP has an MER of 50 bps. Its important to understand that costs arent everything but when it comes to simple market cap-weighted exposure, Vanguard is the one to watch. I recommend EPP as a good addition on top of broad international/emerging market exposure. However, keep an eye on VPL to see if Vanguard makes the mandate changes as I have suggested. My feeling is that they wont. Although this article attempts to discuss emerging markets, some readers may wonder how EPP fits the topic. Again, I discuss EPP here because of the regional proximity to China. This fund is a partial play on China.
Excel India Fund

As much as I extol the virtues of ETFs, Im not a devout follower. Theres no doubt, Ill use ETFs or passive-oriented means whenever I can. But Ive got to believe that unlike the U.S. with its thousands of CFAs, MBAs, PhDs watching and gauging the markets, places like India and China are areas where opportunities to exploit market inefficiencies are more readily available. Frankly, in the case of India, there is simply no ETF-based solution. In fact, there are not many options for investors interested in India. I believe that the Excel India Fund is the only fund in Canada whose focus is entirely on India. The actual portfolio manager, Birla Sun Life AMC Ltd. is based in Mumbai, the financial centre of India, which is important to me. Birla is 50% owned by Sun Life and has US$4.0 billion in AUM (Assets Under Management). The fund started in early 1998 in what was a difficult investing environment. However, its long-term performance is excellent with a 18.8% annualized return (to November 30, 2006) since inception, far better than its benchmark, the Sensex Index. Its YTD return of 27% and 3-year annualized return of 35% (again, to November 30, 2006) is simply fantastic. The fund has underperformed the index over the past two years and especially in 2006. This could be simply due to the fact that the Sensex is heavily weighted in an energy company (12%) and an industrial company (8%) which have performed well. Its bias is more towards conservative value, holding roughly 40 positions through a bottom-up process. When thinking of India, you would think that IT
JANUARY 2007 9
Shares MSCI Pacific ex-Japan Index Fund

Right after introducing my rule of thumb, I now give an example of how it does not apply. Vanguard has a Pacific ETF (VPL) which may seem similar to its counterpart from iShares, the MSCI Pacific ex-Japan Fund (EPP). However, the Vanguard ETF has nearly 75% in Japan. Ninety percent of the fund is in just Japan and Australia. Vanguard has the Pacific ETF as well as a European ETF to allow investors to tilt between the two as opposed to holding them altogether in an EAFE fund such as XIN. I recommend EPP because it does not have Japan, which I will assume investors already hold in a core international equity holding like XIN or in their international equity mutual funds.
Canadian MoneySaver
(Internet Technology) would be the top sector holding. In fact, it is third behind cash and financial services. I was surprised to see a 16% holding in cash as of July 31st but considering the long run-up in the Indian markets over the past five years or so, piling up some cash reserves seems prudent. Main themes for the fund include: infrastructure, personal consumption and the IT industry. The major flaw of active management is the fact that management fees and the costs of trading are a drag on performance. This fund has a 3.48% MER. Considering this is a unique space, the high MER is not that surprising. Id love to see some competition for Excel Funds to put some pressure to lower fees. India is probably the best long-term story out there. The Sensexs correlation with the Dow and TSX Composite are 0.3 and 0.4 respectively which are good. As long as India is able to consume, and increase consumption of what it produces, the economic story should remain intact. Any reduced reliance on exports to the U.S. and the western world only strengthen the argument. My feeling is that this line of reasoning is stronger with India than it is with China.
Excel China Fund

Despite my preference for India over China, the simple numbers show that China can not be ignored. When you consider the nations economic ambitions, in addition to its Olympic and space programs as other examples of its national pride, its clear they are on a mission to dominate. A seat on the UN security council also doesnt hurt. There is a China ETF (ticker: FXI, YTD return: 60% in USD as of December 12, 2006) but I feel better with EPP to capture the regional trading area as well as the Excel China Fund for direct exposure. I recall a presentation by Professor Marvin Zonis (Chicago) who wrote The Kimchi Matters, one of the best books on emerging markets. He mentioned that most or nearly all of the companies in FXI are state controlled. This is an obvious concern as decisions by board of directors and shareholders is one of the foundations of capitalist democracy. The Excel China Fund is invested primarily in Hong Kong and Singapore-listed Chinese companies, where the regulatory framework is on par with the Westonly 4% of the fund is invested in Shanghai-listed companies. The growth strategy lies in identifying companies in the midcap segment that are underresearched or underloved, and whose earnings are breaking out. The fund managers are actively researching companies that will benefit from internal economic reform, planned government expenditure, tax reforms and other centrally planned initiatives, as well from time-to-time some trading opportunities in large cap companies. Key thematic areas of focus for the fund are agricultural reforms, infrastructure, consumption growth, and commodities.
Hamon Investment Group is the portfolio manager and they are based out of Hong Kong. With over US$700 million in AUM they were established in 1989 and have been managing a similar mandate for Dreyfus Funds in the U.S. since 1998. Since its inception (June 2003), the Excel China Fund has averaged roughly 19% per year and its YTD return to November 30th is 58.4%. Sounds good, but like emerging markets in general, this thing comes with volatility. From February 2004 to October 2005, the fund has a long, drawn-out fall of 24%. This summer, the fund fell as much as nearly 6%. For long-term investors, theres nothing wrong with getting in now. However, I would suggest waiting to see what happens in the next few months. If U.S. consumers decide to curtail spending, China and its exporting machine might be of concern. Like the India fund, this one is expensive with a 3.95% MER but with limited choices and the cost for having local talent, youll have to weigh the pros and cons. For someone like me who puts about 90% of a portfolio in ETFtype instruments, putting no more than 5% in India and China makes the burden of management fees rather insignificant. In a world of increased correlations, especially between domestic equities and international equities, focusing on emerging markets, although not perfect, may provide diversification benefits. Due to their volatility, allocations to these two markets should not be any more than 10%. Interestingly, China and India have roughly a 0.3 correlation between them. Even more reason to have exposure to both markets. Excel Fund Management has been managing funds since 1998 and currently has $340 million in AUM. No other company in Canada has a similar focus to emerging market investing like Excel Funds. This is an investment firm to watch. Richard Kang, President and Chief Investment Officer, Meridian Global Investors, 162 Cumberland Street, Suite 300, Toronto, ON, M5R 3N5, (416) 963-7378, rckang@investmgi.com.
Trailer Fees on ETFs!

The new Claymore funds will charge 75 basis points more through their advisor-class units. These trailer fees will be embedded compensation to advisors passed on to investors through the management fees. The common-class units will not carry this advisory cost.
MoneyTips
JANUARY 2007
No-Load Portfolios
Understanding the Benchmarks

Leonard Goodall
n October 2006 major U.S. newspapers carried headlines announcing the stock market had reached new all-time highs. The details of these stories indicated that the Dow Jones Industrial Average had finally passed above the historic high of 11,722 which it had reached on January 14, 2000. In fact, the Dow went on to move above 12,000 that same month. This raises the question of whether the Dow is really the best indicator of the stock market in the U.S. There are literally dozens of benchmarks, or indices, that measure some aspect of various stock markets. They often carry names like Dow, Standard and Poors, Russell or Wilshire. I will discuss five of the major ones here: (1) the Dow Jones Industrial Average, (2) the Standard and Poors 500, (3) the Russell 2000, (4) the Wilshire 5000 and (5) the MSCI EAFE.
mond. It trades on the American Stock Exchange with the symbol DIA. Some investors use a theory called the Dogs of the Dow. This theory advocates investing in the ten stocks in the Dow with the highest dividend yield, and rebalancing the portfolio annually to keep the ten that currently have the highest dividend. This theory is based on the idea that dividends give a boost to a portfolio, but also on the idea that companies may have a high dividend yield because their prices are depressed and ready for a rebound. More information on this theory can be found at dogsofthedow.com.
Standard and Poors 500

Although the Dow is the best known index among the public and the one that gets the most media attention, the Standard and Poors 500 is probably the most widely followed by economists and investment analysts. While the Dow has just 30 stocks, the S&P 500 includes 500 of the largest, most liquid, most widely held U.S.-based companies. It is not precisely the largest 500. An index committee at Standard and Poors makes some adjustments to assure that the companies are liquid, widely owned and represent the various economic segments of the market. If those who watch the U.S. markets most closely were asked to choose just one index to represent the stock market, they would most likely choose this one. The index is based on market capitalization, so the largest companies have the greatest influence on the index calculation. For example, in 1999 the S&P 500 was up 19.5% in spite of the fact that over half the companies in the index had declined in price during that year. Since the largest companies were up in price in 1999, they were able to move the whole index up. Investing in the S&P 500 - An exchange-traded fund known as the Spider is designed to track the performance of this index. The fund trades on the American Stock Exchange with the symbol SPY. Another fund, iSharesS&P 500 (IVV), also tracks the index and trades on the New York Stock Exchange. Since both of these funds trade on the exchanges, they can be purchased by any investor withJANUARY 2007 11
Dow Jones Industrial Average

Charles Dow began publishing a list of stocks in the 1880s, and by 1896 it had evolved into two separate lists, an industrial list and a transportation (mainly railroads) list. The twelve stocks in the industrial list became the original Dow Jones Industrial Average. It included such companies as American Cotton Oil, American Tobacco, Chicago Sugar and U.S. Rubber. The only stock from the original list that is still in the average today is General Electric. That first list of twelve has grown to a list of 30 stocks today. The Dow is a price-based average. Originally the prices of the twelve stocks were totaled and divided by twelve. The first recorded average price in 1896 was 40.94 (compared with 12,000 today). Because of the replacement of some stocks with others, as well as stock splits and dividends, the formula for calculating todays average is much more complicated. It changes frequently as stocks split or pay stock dividends. The formula is published regularly in financial publications such as the Wall Street Journal. Investing in the Dow - Investors wanting to invest in an index fund designed to reflect the performance of the Dow can easily invest in an exchange-traded fund called the DiaCanadian MoneySaver
out regard to residence or citizenship. One of the largest U.S. mutual funds, Vanguard S&P 500 Index (VFINX), was one of the first index funds to be created and is based on this index. The Rydex S&P 500 Equal Weighted Fund (RSP) trades on the American Stock Exchange and offers a new approach to investing based on this index. As the name suggests, it invests equally in each stock rather than basing its investments on the capitalization of each company.
Rowe Price Total Market Fund (POMIX) and Vanguard Total Market Fund (VTSMX).
MSCI EAFE
Although this fund does not track U.S. stocks, it is often used by investors from Canada and the U.S. to help build the international component of their portfolios. It is the best known of the indices maintained by Morgan Stanley Capital International. The EAFE identifies Europe, Australasia and the Far East for the focus of this index. It represents the major companies of developed countries outside North America. It is based on the country indices of 21 countries that include over 1100 companies with a total capitalization of over US$10 trillion. This is by no means the only global or international index. Dow Jones has similar ones, and there are others based in Europe. This is the best known one in North America, however, and the one that gets the most coverage in the press here. Investing in the MSCI EAFE - North Americans wanting to add a core international index fund representing the rest of the world to their portfolios have several good choices. The ETF, iShares MSCI EAFE (EFA), trades on the American Stock Exchange. For those who prefer, and are able to invest in, traditional mutual funds, two good choices are Vanguard Developed Markets Index Fund (VDMIX) and Fidelity Spartan International Index Fund (FSIIX).
Russell 2000
There are several Russell indices, with this one probably being the best known. The Russell 3000 is the most comprehensive of the Russell indices, and its 3000 stocks constitute about 98% of the market capitalization of all publicly traded companies on the U. S. markets. The Russell 2000 is made up of the smallest 2000 stocks in the Russell 3000 index. This index is often used to measure the performance of mid-cap, and to a lesser degree, small-cap companies. It includes many companies that would be considered small, but not the smallest since the bottom 2% are excluded. The index is capitalization-weighted, so the larger companies have a greater impact on index performance. Investing in the Russell 2000 - Investors can invest in the Russell 2000 through either an exchange-traded fund or a traditional mutual fund. The iShares Russell 2000 Fund (IWM) is an ETF that trades on the New York Stock Exchange. The Vanguard Small Cap Fund is a traditional mutual fund that attempts to reflect the performance of this index. Because these funds will not have the stability that often comes from including large established companies in a portfolio, investors in either of these funds should expect to have somewhat more volatility than the indices discussed above would provide.
Index Fund Investing

Regular readers of MoneySaver are well aware of the advantages of investing in index funds. They are discussed frequently in these pages, and various authors have pointed out their advantages. The funds identified above show that index investing can involve a variety of strategies. I have a retirement account in which I invest equal amounts in a large-cap (S&P 500), a small-cap (Russell 2000), a bond and a real estate index fund. Once a year I rebalance the account to be sure that each index continues to represent about 25% of the total. You can develop your own strategy for index fund investing. It is fortunate that there is at least one ETF tracking each of the indices above. This means that Canadians or others who may have difficulty purchasing traditional U.S. mutual funds can still participate fully in investing in any of the indices discussed here. Most investors will not want to do all of their investing in index funds, but a well diversified portfolio of various kinds of index funds is a good start for a successful investing strategy. Leonard Goodall, PhD, CFP, Co-editor of No-Load Portfolios, 6530 West Darby Avenue, Las Vegas, NV, 89146 (702) 871-4710, patgoodall@aol.com
Wilshire 5000
The Wilshire 5000 is generally considered to be the most broad based and comprehensive of all the U.S. market indices. Established in 1974, it attempts to include all publicly traded U.S.-based companies. Although it keeps the number 5000 in its name, the index currently includes over 6000 stocks and constantly grows as the economy expands. The index is based on market capitalization, so even though all companies are included, the largest ones have the greatest influence on index performance. Investing in the Wilshire 5000 - Some investors want to implement a very simple plan of owning just one allencompassing stock fund and one bond fund. These individuals often choose a stock fund based on the Wilshire 5000, and they have several good alternatives to choose from. An ETF, the Vanguard Total Market Fund (VTI), trades on the American Stock Exchange. In addition, there are at least three traditional mutual funds that track this index: Fidelity Spartan Total Market Fund (FSTMX), T.
JANUARY 2007
The Stingy Investor
Five Stingy Stocks for 2007

Norman Rothery
look for two qualities when hunting for bargain stocks: they must be cheap and they must be relatively safe. Not surprisingly, it is often difficult to find stocks that are both cheap and safe. When it comes to cheap, I usually seek stocks with low prices in relation to book value, earnings, sales, or cash flow. It is best to initially search for cheap stocks using only one or two of these fundamental values because each search reveals a slightly different list of stocks. When composing my annual stock list for the Canadian MoneySaver I stick to stocks with price-to-sales ratios of less than one. Stocks with low price-to-sales ratios can be tricky, which is why I also want a degree of safety. Because large firms tend to be more stable than smaller firms, I only consider stocks in the S&P 500. More importantly, companies with little debt and lots of assets are much stronger than firms living on the edge of insolvency. Three ratios are very useful when searching for companies with little debt. Perhaps the most important is the debt-to-equity ratio which is calculated by dividing a companys long-term debt by shareholders equity. The amount of debt that a company can comfortably support varies from industry to industry but debt-to-equity ratios of more than one are generally too high. I prefer to consider companies with even less debt and look for debt-toequity ratios of 0.5 or less. Next up is the current ratio which is calculated by dividing a companys current assets by its current liabilities. Current assets are defined as assets, such as receivables and inventory, that can be turned into cash within the next year. Current TABLE 1 - STINGY STOCK CRITERIA liabilities are pay1. A member of the S&P 500 ments that the com2. Debt-to-Equity Ratio less than or pany must make equal to 0.5 within the next year. 3. Current Ratio of more than 2 4. Interest Coverage of more than 2 Naturally, an inves5. Some Cash Flow from Operations tor would like a 6. Some Earnings companys current 7. Price to Sales ratio of less than 1 assets to be much
Canadian MoneySaver
Table 2: Past Performance Period* 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 Total Gain Since Inception Stingy Stocks -1.9% 33.8% 29.8% 29.2% 28.9% 183.6% S&P 500 (SPY) -22.1% 23.0% 13.4% 8.2% 12.6% 32.3% +/20.2 10.8 16.4 21.0 16.3 151.3
Source: quote.yahoo.com. *Indicates the time between articles and not calendar years.
more than its current liabilities and I prefer companies with current assets at least twice as large as current liabilities. After all, you can be pretty sure that the companys creditors will demand prompt payment of the current liabilities. On the other hand, some of the current assets, such as a firms inventory, might not actually be worth as much as management expects. Finally, a companys earnings before interest and taxes should be large in comparison to its interest payments. The ratio of earnings before interest and taxes to interest payments is called interest coverage and I like this ratio to be two or more. But it is important to remember that a debtfree company does not make interest payments and wouldnt have an interest coverage figure. Nonetheless, debt-free firms should not be excluded from consideration. While the debt ratios that Ive selected are very useful when determining a firms ability to shoulder debt, they are not perfect. Some long-term obligations may not be fully reflected on a companys balance sheet and are, sensibly enough, called off-balance sheet debt. Regrettably, offbalance sheet debt is often ignored but it can be a source of considerable consternation. For instance, sneaky legal liabilities can sideswipe what might otherwise be a good investment. As with all screening techniques, be sure to embark on a more detailed investigation of each stock before making a final investment decision.
JANUARY 2007 13
Continuing the safety theme, TABLE 3 - STINGY SELECTIONS FOR 2007 I also want a company to show Share Price / Debt to Current Interest Price / Dividend some earnings and cash flow Company Name Price Sales Equity Ratio Coverage Cash Flow P/E Yield from operations over the last Ashland (ASH) 67.99 0.59 0.03 2.1 366.0 14.7 26.9 1.6% year. After all, it is less likely that Dollar General (DG) 15.46 0.54 0.31 2.1 23.7 9.7 16.2 1.3% a business will go under when it Genuine Parts Co. (GPC) 46.61 0.77 0.18 3.1 31.4 14.9 17.4 2.9% is profitable and has cash comLeggett & Platt (LEG) 23.69 0.77 0.47 2.6 9.1 9.4 16.1 2.9% ing in the door. Liz Claiborne (LIZ) 42.62 0.90 0.36 2.4 12.7 10.9 17.1 0.5% All of my criteria are summarized in Table 1 and Ive used the Source: www.stingyinvestor.com, www.msn.com, December 2, 2006 same criteria over the last five years to find interesting value stocks. Table 2 summarizes the strong past performance of Bargain hunting was a little more difficult this year with the method. Since a rocky start in 2001, the stingy stocks only five stocks passing the stingy test, down from eight have provided a total gain of 183.6% assuming that the stocks last year. This years crop of stingy stocks is shown old stocks were sold and the new stocks purchased each in Table 3. year. In comparison, the S&P 500 (as represented by the I hope that Ive piqued your interest, but be sure to fully SPY exchange-traded fund) lagged by 151.3 percentage investigate each stock, and talk to your investment advisor, points over the same period. before investing. Remember that, although the stingy stocks Despite outperforming the S&P 500 by at least 10 perare relatively safe, there is no such thing as a risk-free stock. centage points a year, I should hasten to add that I dont expect my method to routinely produce stellar results. I Norman Rothery, PhD, CFA, Financial Consultant, Dan fully expect that it will encounter a down year, both comHallett & Associates Inc., 430 Pelissier Street, Suite 501, pared to the S&P 500 and absolutely, from time to time. Windsor, ON, N9A 4K9 (416) 243-9580, rothery@stingyinvestor.com
Utility Forecaster portfolios. As an income deposit security, Atlantic Powers dividend should be exempt from the tax changes. Distributions for Boralex Power Income Fund have historically been 90 percent ROC, meaning very little would be taxed at the corporate level. In contrast, Pembina Pipeline owners get a small break with dividends at 25 percent ROC, while ARC Energy gets little at 2 percent. Of other How They Rate trusts, Bell Nordiqs was 11.7 percent ROC in 2005. Calpine Power Incomes was 70 percent, Great Lakes Hydros 54 percent, Enerplus 5 percent, Penn Wests 0 percent and Provident Energys 23.5 percent. Bell Aliant converted this year and hasnt published ROC information, but as a rural telecom it should mirror Bell Nordiq. All of these trusts represent solid businesses, capable of dishing out solid returns as trusts and as corporations beginning in 2011. That makes them worthwhile holdings, even if you bought in at higher levels. Roger Conrads Utility Forecaster (US$129, 12 issues), PO Box 4123, McLean, VA 22103 (800) 832-2330 (12/06)
THIS COLUMN OFFERS EXCERPTS FROM PUBLISHED SOURCES TO PROVIDE OTHER VIEWPOINTS.
Trusts After The Tax

The silver lining here is in three parts. First, theres no change to trust taxation for four years, which leaves plenty of time to garner high income. And there may be some favorable tweaking of the rules. Second, well-run trusts are already pricing in dividend cuts of 30 percent plus that still look unlikely. And many trade with valuations below those of their nontrust peers, so they wont
lose by converting to corporations. Third, four years leaves plenty of time to minimize future tax bills. And many trusts are far less exposed than is widely believed. The key is return of capital (ROC): the higher its percentage of a trusts dividend, the lower the amount taxed beginning in 2011. Theres huge variations between individual trusts, including the four in the
iShares S&P 500 Value Index Fund (IVE)

This exchange-traded fund invests in the valueoriented holdings of the Standard and Poors 500 Index. Its returns are shown in the table below. If large-cap companies begin to outperform smallcap companies, as some think will happen after
JANUARY 2007
IVE RETURNS 2001 2002 2003 2004 2005 -11.5% -21.0% 31.4% 15.6% 5.6%
seven years of small-cap outperformance, this fund should do well. It invests in companies which are selected by a multi-factor investment model to be the most value oriented of the S&P 500 companies. The funds major sector holdings are in financial services (21.7%), health care (12.9%), industrial materials (11.9%) and energy (9.8%). Its largest investments are Citigroup, General Electric, Bank of America, J.P. Morgan Chase and Exxon Mobil. The fund has a very low expense ratio of just 0.18%, which compares favorably with the expense ratio of most traditional index mutual funds. The fund would make a good core holding for the conservative investor. Because this is an exchange-traded fund, it has no minimum investment. You buy it through a broker and pay a brokerage fee. Therefore, it is wise to buy it through a low cost discount broker or Internet broker. No-Load Portfolios (US$99, 12 issues), 8635 W. Sahara, Suite 420, The Lakes, NV 89117 (10/ 06).
Shoppers Drug Mart: Over the Border Rx

Richard Croft writes: Canadian retail drug store chain, Shoppers Drug Mart Corporation (SC, $49.53, Toronto), has attributes of a solid investment. It posted 3Q earnings of $0.57 per share, a 14.8% increase year-over-year, as front-store, same-store
Canadian MoneySaver
sales rose 2006 5.2% and 9.1% pharmacy same-store sales expanded 8.2%. And Shoppers is poised for even more organic growth over the next few years. The company has shown surprising strength in the face of governmentregulated price changes to generic drugs in Ontario and the advent of the first of Wal-Marts new Supercenters. The repricing of generic drugs in Ontario should have little effect on earnings going forward, as volumes are expected to increase substantially. The Wal-Mart effect wont hit Shoppers as much as other large retailers, because WalMarts drug/health-andbeauty segment is not expected to expand significantly in the new Supercenters, leaving Shoppers in about the same competitive position as before. The company has plenty of room to grow in underserved markets in Western Canada and Quebec and it continues its diversification strategy by acquisition of such companies as MediSystem Pharmacy and MediSupply, specialty clinical and medical supply operations. Were looking for a target price of $52 within a year. Buy. Dick Davis Digest (US$180, 24 issues), PO Box 26774, Tamarac, Florida 33320 (800) 654-1514 (12/06)
878-8889; www.tempurpedic; Shares outstanding: 83 million; Market cap: $1.7 billion) continues to rise in price since reporting sharply improved results in the three months ended September 30, 2006. Sales rose 16.9% to $240.9 million from $206.1 million. Earning rose 66.2% to $28.9 million from $17.4 million. Earnings per share rose 100% in the latest quarter to $0.35 from $0.18, on fewer shares outstanding due to share buybacks. Tempur-Pedic makes and distributes Swedish mattresses and neck pillows made from its proprietary Tempur pressure-relieving material. Sales in the United States rose 24.2% in the latest quarter, with international sales up 3.6%. Tempur-Pedic now expects to report earnings towards the high end of its estimate for this year of $1.26 to $1.31. Despite the price rise, the stock still trades at just 15.9 times the average of this years estimate. Tempur-Pedic is still a buy. Stock Pickers Digest, ($168, 12 issues), 9776021 Yonge Street, Toronto, Ontario M2M 3W2 (416) 756-0888 (12/06).
Dividend Growth
On December 1st, Fortis increased its dividend from 16 cents to 19 cents a quarter - just three cents, but thats up 18.8%. I worked out our new yield on cost by dividing FTS new annual dividend of .76 by our purchase price in 1995, which because of the four-for-one split last year is now $6.16 (.76/6.16= 12.3%). We originally bought 500 shares for $24.64 = $12,320. With the 4:1 split, now we have 2000 shares valued at $24.85=$49,700. Fortis now supplies $1,500 a year in income. You must work out your yield on cost (YOC) for any shares you have held for a few years that have growing dividends. Among other things, doing this will convince you first, not to worry about any future market downturn. A drop of a few dollars on a stock selling for $24 with a cost of $6 a share is no cause for alarm. Secondly, the data will allow you to compare returns. Our TransAlta, for example, purchased at about the same time as our Fortis has a YOC of only 4.5% and a gain of only $1,300. TA had 2 dividend growth in the last decade. I have vowed never to buy a stock with poor dividend growth again. All you really get is yield. Connolly Report, 607-185 Ontario Street, Kingston, Ontario K7L 2Y7. Closed to new subscribers.
TransAlta Corp
Earning double at TPX

Tempur-Pedic ($20.37; New York symbol TPX; SI Rating: Speculative; 800http://www.canadianmoneysaver.ca
MoneyTips
TA is no longer offering a 5% discount on shares purchased through its DRIP.
JANUARY 2007 15
Financial Skeptic
Board Elections Who to Vote For and Why

George Gutowski
board of directors is supposedly hired by investors to represent the interests of investors. Investors should no longer routinely accept the recommendations of management. Investors receive annual reports and proxy forms to elect directors and vote on various issues. Yearend results are announced near the end of the year! Somewhere in the range of 90% of publicly traded companies have a yearend of Dec 31. This means the window for annual meetings and proxy solicitation is very tight. Many investors either find this process bewildering or they just plant their collective heads in the sand and ignore it. It does seem to go away. Most investors will have a sense of earnings, dividends, PE ratios and other forms of measurement. What do you really know about the board members? What do you really know about the new members? Why are certain board members on certain committees? Why is one fellow, in particular, the chairman? I find director bios to be laughably abbreviated. Yes, much of the profile has a teflon coating to it as various PR spin teams have polished it. We need to start asking board members some simple and direct questions. The questions are not unlike interviewing for a job. This season may be particularly challenging as we may have another national election at around the same time as the annual meeting season. Some people will find this distracting. We should understand what this man or woman is going to do for us and more importantly what will they do with our money. Here are a few questions I believe should be applied to board nominees.
leaps. Understanding their motivation will be important. General comments about how I wish to serve and better the world will not cut it.
3 4
What are the persons social network all about? Are board members nominating each other to the same circle of boards? If so, they will loss focus. The network will support itself first and then worry about the shareholders.
How independent will the individual be? Can s/he stand up to management? Is there another relationship that may become a significant factor? What other boards do they sit on? Where is their primary source of employment? Other questions should come to mind when the investor ponders the choices. Many investors may not want to do this. It is time consuming. Very little credible resource material is readily available. My suggestion is to communicate directly with corporate management (usually the investor relations department), as well as attempt to communicate directly with the nominees. If we can develop a grassroots ground swell of sober reflection, management will be forced to engage the investor on these issues. The issue is critical. Investor losses have always been severe or disastrous when the board failed. You can analyze the numbers all you want, but when the leadership is weak they will find a way to lose your money. This is a lot of work. But did you not work a lot for your money? I am interested in hearing stories from any readers who attempted to do some work in this area. We may develop some insights into companies depending on how they conduct themselves in these circumstances. George Gutowski, MBA, Author of both Financial Self Defense for Investors and the Financial Skeptic newsletter, 34 Tiverton Avenue, Toronto, ON, M4M 2L9 (416) 4613126, georgegutowskiebox@hotmail.com.
Why is this individual being nominated? Usually the propaganda points to a wealth of experience. Experience is fine, but is it applicable to this company? When experience is being touted, we should have a sense of some war stories about this individual. When you work with someone you will know how s/he performs in certain situations and why.
1 2
Why is the person willing to take the position? Directors liabilities and responsibilities are taking quantum
http://www.canadianmoneysaver.ca JANUARY 2007
Financial Instruments
Portfolio ConstructionFinancial Services

Bruce Campbell
n a previous article I gave an overview of the energy sector construction of a portfolio. This month, I will concentrate on how to put together the financial services section. At the end of the quarter, November 2006, the TSX index had a financial services weight of approximately 32%. As mentioned previously, I was mentored in the business under a specific style that I am still comfortable with almost 30 years later. We called it top down with a bottom-up twist. In other words, as an investor you develop a certain overall view about the macro-economics, interest rates, politics, etc. You also decide your own risk tolerance. Are you preserving capital or going only for growth or possibly somewhere in between? That determines whether or not you would prefer to be over or underweight certain groups. This can also be applied to a particular sector of the market as well. The Canadian financial services portion of the TSX continues to be a primary driver of the Canadian Composite Index and has generally been the largest weight for 30 years. Occasionally, tech or energy passes it at a cyclical peak and then they fall back. The Canadian banks, which are about two-thirds of the financial services weight (18.5%), have an oligarchic domination that allows good, steady, long-term returns. They are not as cyclical or interest sensitive as they used to be. Many of the large banks in this country have retreated to retail businesses and do not chase big international, corporate loans anymore. This is the main reason why we would still advocate having a fairly high weighting in the Canadian portion of an investors equity portfolio. Also, with the demise in large part of income trusts, they are the largest, safest, dividend payers in Canada. The insurance industry has grown from almost zero, a few years ago, to 9.0%. With the demutualization of the large Canadian firms, there is now a good selection of companies to choose from with different characteristics. They do not just provide customers with life insurance anymore; they are into mutual funds, health and disability insurance and many have expanded internationally.
The key, though, is to spread your risk within the sector itself. Not all positions are created equally. We would break our weightings up into 5 different types: senior banks, major life insurance companies, P & C insurance companies, smaller growth banks and real estate companies. In Canadian senior banks, our 4 favourites are TD Bank (TD), CIBC (CM), Royal Bank(RY) and the Bank of Nova Scotia (BNS). They all provide an investor with slightly different exposures: TD is now focused on the retail business only, TD Canada Trust for Canadian retail, TD Banknorth for U.S. retail and TD Ameritrade for U.S. discount brokerage. It has a safe, profitable and growing revenue stream. The Bank of Commerce is also focusing on Canadian retail but also, with recent acquisitions, has a nice exposure to Caribbean banking. Their recent quarter showed how well the retail focus is working. The Royal Bank has its retail side here in Canada but is a little more focused corporately and has RBC Centura on the U.S. retail side, which is small but now profitable. The Bank of Nova Scotia is the most international bank with holdings in Mexico, the Caribbean, Japan, southeast Asia and South America. On the insurance side, investors should be looking for growth and diversity. Again you get differences: Manulife (MFC) is Canadian life and health focused but also owns John Hancock in the U.S. and has a large and fast-growing business in Asia. Great-West Lifeco (GWO) is big in life and health insurance in Canada, has a large health insurance focus in the U.S. and a small but growing European operation. Lastly, Sun Life Financial (SLF) is Canadian life insurance focused as well, but owns a U.S. mutual fund business, which may be sold, and has a small joint venture in India. In P & C insurance, I would favour Kingsway Financial (KFS). They are primarily a U.S. high-risk auto insurance company but have a good long-term track record and are extremely profitable. The stock is statistically very cheap. Junior financials are somewhat riskier and should be kept to an appropriately small percentage of the portfolio but if
JANUARY 2007 17
Canadian MoneySaver
used successfully can add some extra return to a portfolio. I look for experienced management teams, long track records on their liability side and good balance sheets. Canadian Western Bank (CWB) stands out as fulfilling all of the criteria mentioned above but the stock looks fully valued. On weakness, this would be a good, long-term holding. The real estate sector (which is now included in the financial sector and with trusts included are 3.1% of the index) has a good choice in both limited companies and REITs. A mixture of both might make sense. It would be hard to go wrong with Riocan or Boardwalk. Riocan (REI.un) is the largest REITa good shopping centre play as it is geographically diverse and very well managed. Boardwalk (BEI.un) is the largest apartment REIT with a large western Canadian exposure, which is benefiting from the growth in Alberta. Although an investor should do his or her own research on the individual names, constructing a portfolio in this manner (with the macro-overview) will never let you get too far deep into one area, even within the financials as a
whole. Not everyone will have the depth to own 8 or 9 names but regardless of how many names you own, be cognizant of what they are. Lower your risk as much as you can by the diversifying your choices. One way to keep that from happening follows. Whenever you get more than 50% over the index weight, start to take profits. That has usually happened because that group is outperforming. The same goes for the bottom side. If you have a low exposure that has dropped below half of the index weight that is usually a sign that longer term they will show a recovery. This system allows an investor to use the checks and balances as a way to make sure that they are not too far out on a limb as far as weightings, both in the portfolio overall and, as in this case, within the financial services weight of the portfolio. Bruce Campbell, MA, Portfolio Manager, Campbell & Lee Investment Management Inc, 1075 North Service Road West, Suite 200, Oakville, ON, L6M 2G2 (905) 4694630, bruce@campbelllee.com
CANADIAN DIVIDEND REINVESTMENT PLANS (DRIPs) WITH SHARE PURCHASE PLANS (SPPs) TSX 52 WEEK CLOSING YIELD COMPANIES - SYMBOL HIGH $ LOW $ PRICE $ DIV $ % P/E
Aberdeen Asia Pacific FAP Pulse Data Inc PSD Cdn Gen Investment CGI BCE Inc BCE Emera EMA Bk of Montreal - BMO TransAlta Corporation TA National Bank ^ - NA Bk of Nova Scotia - BNS TransCanada Corp TRP Cdn Imperial Bk (CIBC) - CM Enbridge - ENB TELUS - T.A Fortis FTS Sun Life Financial SLF Manulife MFC Alcan* - AL Imperial Oil - IMO IPSCO IPS MDS Health - MDS Suncor Energy SU Agnico Eagle Mines* - AEM 9.05 3.39 30.99 34.25 22.98 72.22 26.91 66.49 53.39 40.34 97.23 41.45 65.35 28.85 51.75 39.45 64.99 45.20 126.99 23.20 102.18 52.03 7.46 2.10 22.00 25.32 17.69 58.58 21.88 55.89 41.55 30.77 73.25 31.75 42.05 20.36 41.79 33.74 41.78 34.31 90.00 18.56 71.07 20.00 8.95 2.53 28.78 29.73 22.87 68.97 26.20 65.88 52.04 39.99 97.23 40.75 54.94 28.74 50.08 39.03 56.66 44.54 117.32 20.00 92.24 49.00 0.72 0.15 1.50 1.32 0.89 2.60 1.00 2.16 1.68 1.28 2.80 1.15 1.50 0.76 1.20 0.80 0.92 0.32 0.80 0.13 0.32 0.04 8.0 5.9 5.2 4.4 3.9 3.8 3.8 3.3 3.2 3.2 2.9 2.8 2.7 2.6 2.4 2.0 1.6 0.7 0.7 0.7 0.3 0.1 39.4 22.5 4.0 14.7 19.2 13.1 19.9 12.6 14.5 16.8 13.0 22.3 23.0 21.9 14.3 16.2 19.2 13.5 7.2 66.7 12.5 36.5 name) to buy additional shares periodically at no cost except for Manulife and Sun Life. See MoneySavers Message Board for share exchange options: http:// www.canadianmoneysaver.ca/rc_msg_topic.aspx. * Dividends paid in U.S. dollars and receive dividend tax credit. Non-Canadian company dividends are taxable like interest income. ^ For National Bank you need to own 100 shares for the DRIP and 1 share for the SPP. Only Pulse Data and Agnico Eagle now offer 5% discounts off the market price for their DRIPs. Bank of Montreal increased its dividend 4.8% to $2.60. Bank of Nova Scotia increased its dividend 7.7% to $1.68. Canadian General Investment increased its dividend 21.0% to $1.50. Manulife increased its dividend 14.3% to $0.80. National Bank increased its dividend 8.0% to $2.16. Telus increased its dividend 36.4% to $1.50. Calculation for interest equivalent of dividend yield: (100 - marginal rate for dividends) divided by (100 marginal tax rate on regular income). For example, in 2006 an Ontario taxpayer with ordinary income of $61,512 uses: (100 - 9.01) divided by (100 32.98) is approximately 1.3597. Therefore, a stock with a Canadian dividend yield of 5.0% has an equivalent interest return of 5.0 x 1.3597, which is approximately 6.79%. You may calculate your own dividend-to-interest ratio with the tax rates supplied by Brian Quinlan in the Nov/Dec issue each year. These ratios will change once the new legislation is enactedthe dividend tax credit will be greater. See http:// www.canadianmoneysaver.ca/rc_drips_spp.aspx for more DRIP info.
CHART NOTES - Closing prices on December 13, 2006 - Stock prices change daily. Check for current prices. These Canadian companies listed on the TSX are the only companies with both a DRIP and SPP. With the DRIP, you can reinvest all your dividends to purchase additional shares at no cost except for Manulife and Sun Life. The SPP allows shareholders (shares registered in your own name, not a brokerages
JANUARY 2007
Beating The TSX
Why Im Sticking With Income Trusts

David Stanley
bought my first income trust in 1993 and it is one that I own today in my RRSP. Currently, a significant portion of my RRSP is invested in income trusts and the other half in short-term bonds, a result of the flattening yield curve. The recent decision by the federal government to introduce a tax scheme aimed at income trusts will be painful, no doubt, but it hasnt convinced me to sell them. Heres whythe initial purpose of income trusts for my RRSP was to produce high yields with some capital gains, but as I approach RRIF time that has changed. I now want my income trusts to generate enough cash to help defray the mandatory yearly withdrawals so that I dont have to sell any equities and incur trading costs, and I want my RRIF to last as long as possible since it may be passed on to a surviving spouse. Lets see how that might play out by looking at a hypothetical case. Consider a situation where someone who holds an RRSP worth $250K and must convert it in 2010, one year before the onset of income trust taxation. The RRSP contains half short-term bonds yielding 4% and half income trusts yielding 8%. We will assume a tax rate on income trusts of 31 percent, although I gather we dont know the exact final number yet, and we will further assume that distributions will be cut by an amount equal to the tax rate and that capital gains are negligible. Federally mandated withdrawal rates for the first 5 years of a RRIF are:
AGE 69 70 71 72 73 % 4.76 5.00 7.38 7.48 7.59
5%, or 4%, not enough cash will be generated within the portfolio to satisfy the ever-increasing withdrawal rates. Thus, by age 71 when 7.38% will need to be taken out, obviously a rate of return of 7.38% is needed to keep pace. Without capital gains it is apparent that selling will be needed to meet the withdrawal requirement. Once this begins, the downward spiral accelerates yearly. Thus, we need the highest possible returns in the RRIF to forestall the exhaustion date. To determine exactly how important return rates are, one can visit taxtips.ca (http:// www.taxtips.ca/calculators.htm#) and perform some calculations. We will look at three scenarios; in the first, the 20year performance of a 250K RRIF where only the minimum withdrawals are made is graphed for three different yields (Figure 1).
FIGURE 1. HOW THE RATE OF RETURN DETERMINES THE VALUE OF A RRIF.
So, in the first year our RRIF holder must withdraw 11.9K and pay tax on that amount as if it were income. In 2010 the portfolio would generate 15.0K [(125K X 0.040) + (125K X 0.080)] but in 2011 only 11.9K [(125K X 0.040) + (125K X 0.055)]. In both cases enough cash would be generated to offset a mandatory first-year withdrawal. However, in a few years, no matter if the blended yield is 6%,
Canadian MoneySaver
This shows the significance of rate of return on the RRIF value. After 20 years the portfolio being replenished at 6% was worth about 50% more than one earning only 4%. Another way to look at this is calculate the duration of the RRIF using a fixed annual withdrawal. In this case we will take out 24K/yr and assume a 2.5% inflation rate, again looking at the rate of return (Figure 2).
JANUARY 2007 19
FIGURE 2. HOW THE RATE OF RETURNS DETERMINES THE LIFE OF A RRIF.
The rate of return has a major influence on the useful life of the RRIF. Also, a corollary is that the more you start with the longer a RRIF will last making maximum yearly contributions manditory. Finally, we will examine the effect of rate of return on the maximum withdrawal that can be taken out of the RRIF over a 20-year period starting at age 69 (Table 1).
TABLE 1 - HOW THE RATE OF RETURN DETERMINES THE MAXIMUM WITHDRAWAL FROM A RRIF FOR A 20-YEAR TERM. Rate of return (%) 6 5 4 Yearly Maximum Withdrawal $21,796 $20,061 $18,395
So, a 1% increase the rate of return equates to nearly a 9% increase in the maximum allowable drawdown, a not insignificant amount over the course of ones retirement. By now I think it has been demonstrated quite clearly that the rate of return earned in a RRIF is of prime importance. The question becomes how does one maximize that rate.
Given the current understanding of what will happen to income trusts, investors may be tempted to jettison them from their portfolio. As always, we need to think about what we would replace income trusts with. Bonds? If the yield curve stays as flat as it is now, it would seem that a 4% yield might be as high as can be expected, no matter what the duration. If we exclude the riskier small-cap stocks and concentrate on the blue-chip large-caps that pay significant dividends, we are looking at companies similar to those in our Beating The TSX portfolio. Over almost a 20year span the yearly total return of the 10-stock portfolio has averaged a little over 13%, but not without some volatility. Results have varied from +55% to -14%. This type of variation can really hurt a RRIF account in the event of a string of bad luck at the beginning of the withdrawal period since no further contributions can be made. Where does that leave us? With bonds that return very little above true inflation, with income trusts whose distributions are going to be taxed before they reach us, and with stocks, where even the traditionally safest and best performing can go through troughs of underachievement. For me, I think diversification can be a useful tool in situations such as this. Some bonds for safety, some income trusts for higher distributions, and some good quality stocks with the hope of capital gains. The exact proportion of each class would have to be decided upon by the investors tolerance for risk and the importance of the RRIF in the total retirement budget. Even given the proposed legislation on income trusts, I think income trusts can play an important part in a diversified RRSP/RRIF. As always, I hope this column will generate discussion and I will attempt to answer your questions. Note: I wrote the above quite soon after the Ministers October announcement. At that time we were given to believe that the details would be available soon. It now appears that they wont be released until sometime in the new
A Simple Theoretical Example

Consider three starting RRIF values, $250K, $240K, and $230K. We can calculate the duration of the RRIF using a fixed annual withdrawal of $24K and rates of return of 4, 5, and 6%. Check the graph. The individual beginning with $250K but achieving only a 4% rate of return will run out at age 81, but this is the same age as the individual who began with only $230K and achieved a 6% return. Does this mean that the initial RRIF value is unimportant? Of course not, but, on the other hand, dropping a little (involuntarily) because your
income trusts have lost some of their value does not present an insurmountable problem as long as their distribution is not cut, when compared to someone who sold income trusts and switched to lower yielding bonds.
JANUARY 2007
year, perhaps not long before the bill is tabled and shortly before a budget vote is taken. This will surely curtail any time for consultation about the proposed legislation and restrict an individual investors ability to react before the bill is voted up or down. These conditions can often lead to panicked reactions and I would suggest a calm evaluation of all the details before taking any action. David Stanley, PhD, PO Box 12, Rockwood, ON, N0B 2K0 (519) 856-9820, DavidS5209@aol.com
MoneyTips
P.R. =
Payout Ratios
The formula to calculate the payout ratio for a stock follows:
Dividend of the Stock Earnings of the Stock
If the P.R. of a stock is 75%, then 75% of the current earnings are paid to the shareholders in the form of the dividend.
Investor Protection
Portfolio Turnover
Ken Kivenko
funds turnover rate basically aims to represent the percentage of the funds holdings that change every year. Its important as an indicator of management style, fund cost structure and tax exposure. An inherent disadvantage of most actively managed funds is that they dont want to show a lot of low-yielding cash or have the fund exposed to income taxes so a certain amount of transactional activity/ distributions is always present. Virtually all mutual funds contain unrealized capital gains that could result in unexpected and untimely stock sales and capital gains distributions. Fund prospectuses rarely alert investors to the tax issues related to the funds investment strategy. John Bogle, author of Bogle on Mutual Funds observed In no other section of the financial services field are cost and value more closely linked. Bogle scrutinized the invisible cost of executing portfolio transactions. Even though giant funds pay lower commissions than do individual investors, brokerage costs can account for 0.5% to 2% per year of fund assets. Furthermore, he noted that smaller funds with high rates of turnover have even higher costs and that equity funds have portfolio turnovers almost double that of pension funds. When mutual funds had low turnovers of about 16 % (in the fifties and mid-sixties) they were stockowners, at 110% they are stock traders. He notes that at 16 % turnover, a $1 billion mutual fund sells and buys a
Canadian MoneySaver
total of $320 million worth of stock a year. But at 110% portfolio turnover, the fund sells and buys a total of $2.2 billion of stocks annually.
Definition
Portfolio turnover is formally defined by regulators as the lesser of purchases or sales of the portfolio securities for a financial year divided by the average value of portfolio securities during the year and multiplying by a 100% to convert to a percentage. Excluded from both the numerator and denominator are amounts relating to all securities having a remaining term to maturity on the date of acquisition by the mutual fund of one year or less. If a fund has a 100% turnover rate that means the fund manager, in theory, has sold every single stock position once. In practice, however the manager might have held 50% of all positions for the past 5 years and turned the other 50% twice throughout the year.
Example
Assume the $100 M fund is performing poorly and there are net redemptions throughout the year, resulting in stock sales to provide cash to unitholders. If securities sales = $41 M and purchases = $28 M, then the portfolio turnover is 28/100 x 100%=28%.
JANUARY 2007 21
In this situation, the statistic dramatically underestimates the level of trading. Unless securities sales and purchases are approximately equal, this statistic, as defined, will always provide a low estimate of transactional activity. Because the turnover formula sometimes uses sales and sometimes uses purchases, you cant depend on it to provide a consistent indication for assessing tax impact. Morningstar Canadas website provides pre and after-tax returns for most mutual funds.
Impact of High Turnover

One big consequence is that you might have to pay substantial taxes on any capital gains adversely impacting your current after-tax returns and cash flow. AND capital gains dollars on your T5 slip reduce the amount of money available for long-term compound growth. High turnover often means lots of distributions if managers spin out their trading profits to unitholders (otherwise the fund itself must pay taxes). Not all turnover of stocks inside a mutual fund trigger realized capital gains, e.g. high turnover of stocks that have declined in value. Turnover can be reduced if net new money is injected into a fund but increased if there are net redemptions. You could have tax exposure even if a fund posted a negative return as happened to many investors at the end of 2000.Canadian equity fund managers turn their portfolios over between 30 to 150% a year and often much more. Request the 5-year turnover history for your funds. Total trading expenses, which include brokerage commissions and the market impact of buying and selling massive amounts of shares, are not an insignificant cost. Unduly high turnover adds to fund expenses and reduces returns. The Trading Expense Ratio(TER) that regulators now require fund companies to disclose provides an indication of the impact on pre-tax returns due solely to quantifiable brokerage commissions (since bonds have embedded commissions, the TER is misleading for bond and balanced funds). Moving substantial blocks of securities around, especially on the relatively small TSX, tends to move market prices. The funds will be able to liquidate a large position only at a discount from prevailing prices and to purchase a large position only at a premium. Additionally, a time delay in liquidating a large position can give rise to an opportunity loss if the price migrates downward during the interval. Because other funds in the fund family are likely to take on similar stock positions, the effects could be larger than would be the case if the funds were independent.
A fund may also have to sell part of its holdings to meet unitholder redemption requirements. With the growth of the Canadian fund industry and reinvested distributions, funds must buy additional stock to actively manage the fund or track an index. The portfolio turnover ratio for income funds, bond funds and balanced funds may tend to be higher than for other funds because their portfolios usually have a higher percentage of bonds and other fixed-income investments which mature or are called during the year. This means that these funds must continually replace some of their investments. Index funds may have lower portfolio turnover and therefore lower transaction expenses especially if their index is limited, e.g. DJIA consisting of 30 stocks but a S&P 500 index fund may have a higher turnover metric than a buy-and-hold fund. Another point. Mutual fund managers turnover as well. When a new manager arrives, its more than just a new name on the annual report. A new manager can dramatically alter the portfolio, sometimes within weeks, and turn it into a very different fund than what an investor initially bought, as well as incurring significant trading expenses. A 1997 Morningstar study of domestic U.S. stock funds on the adverse impact of portfolio turnover concluded that in general, the lower a funds turnover, the higher its returns. This relationship is statistically significant, and it holds up for all of the time periods measured Turnover has clearly done the most damage to large-cap value and blend funds, overall. The clearest pattern is that the benefits of turnover decrease as risk levels decreaseturnover has been more rewarding in the high-risk segments of the style box. This relationship makes sense. The more volatile the stock, the better the chance that smart trading can bring in substantial gains, or avoid crippling losses. Indeed, in a fastmoving market, a suddenly unpopular stock can lose 50% or more of its value in a matter of days (or hours)
Conclusion
If funds are held outside a registered plan, examine what your after-tax return has been. Thats the return that counts. Tax-efficient funds attempt to minimize short-term capital gains with low turnover ratios and by offsetting gains with losses as they weed and feed their portfolios. Rather than relying on the most recent year of turnover data, take an average over 3-5 years to see the trend. The MER, however, appears to be the single most important indicator of longterm, pre-tax mutual fund returns. Despite its imperfections, the portfolio turnover statistic, when combined with other indicators and data such as historical capital gains distributions and trading commission expenses, can provide useful information particularly as regards style/trading practices, costs of fund ownership, income tax exposure and tax-efficiency relative to other
JANUARY 2007
Some Issues
Turnover can be higher than expected due to a mutual fund selling off securities to trigger capital gains (exit an overvalued stock) or use tax loss carryovers from prior years.
funds in the same category. If you do find a high turnover, high performance mutual fund you want to buy, consider putting it in a tax-deferred account. In any event, use turnover as a tie-breaker. If you find 2 funds in the same category that are equally attractive, lean towards the one with the lower portfolio turnover ratio. Ken Kivenko, PEng, President , Kenmar, 2010 Islington Avenue, Suite 2602, Etobicoke, ON, M9P 3S8 (416) 2445803, kenkiv@sympatico.ca
Interest Returns
Often we look to term deposits, GICs and the like for our interest income. You may gain greater returns depending on such factors as the investment amount and term with treasury bills, commercial paper, and bankers acceptances. Always shop around for the best rate. (TD Waterhouse lowered their minimum to $100,000 for you to qualify for their Premium Money Market Fund.)
MoneyTips
Gentlemen Prefer Shares
Interest-Bearing Preferreds
James Hymas
hat? my interlocutor gasped, you mean there are preferred shares that pay dividends? I assured him that dividend-paying preferred shares were not only extant, but normal. He had been asking about his holding of BAM.PR.T and what should be done about it. An advisor had recommended it to him for his RRSP several years earlier and he had dutifully bought it without much further investigation. BAM.PR.T is an example of a preferred security, which may be defined as an interest-bearing investment trading without accrued interest on a stock exchange, with at least some attached covenants ranking it ahead of the common stock. Many of these were issued in Canada under the Merrill Lynch trademark, Canadian Originated Preferred Security (COPrS), and enjoyed a vogue for a few years since. Provided the terms of issuance were sufficiently favourable, the issuer could treat the financing as equity rather than debt for balance sheet purposes. Such qualifying terms included a very long term to maturity and the ability of the corporation to suspend interest payments without triggering a default. In other words, the holder of the issue might be very angry that he was not receiving payments and be able to ensure the suffering was shared by the common shareholders, but could not petition the corporation into bankruptcy.
These games are over now. As Shaw Communications noted in their press release (http://biz.yahoo.com/iw/ 060630/0140872.html): Effective September 1, 2005 the Company retroactively adopted the amended Canadian Standard, Financial Instruments - Disclosure and Presentation, which classifies the Companys Canadian Originated Preferred Securities (COPrS) and the Zero Coupon Loan as debt instead of equity. A few such issues are still trading, but most of the interest-bearing preferreds now trading have been issued by split share corporations with investment portfolios concentrated in the income trust sector of the market. As was noted in the November issue of Canadian MoneySaver, split share corporations will, in essence, split the total return on a portfolio into income and capital gains, with the income being earmarked for the preferred shareholders and the capital gains for the capital unit holders. Some of the splits are precise, some are woefully out of balancebut thats the idea, anyway. Income trusts, as shell-shocked veterans of the Halloween massacre will remember, pay interest income, not dividends, and thus trusts specializing in this market will have only interest income to distribute to their preferred shareholders. We dont know how long this particular investment model will last, but for as long as it does we must understand the instruments designated as Preferred by both the Toronto Stock
JANUARY 2007 23
Canadian MoneySaver
http://www.canadianmoneysaver.ca Chart 1
The annual reports are all fairly dated. More information can be obtained from company filings on SEDAR, from the company websites and from the daily newspaper. BSD.PR.A, for instance, is backed by a portfolio of income trusts. Unless we have more precise information, it is prudent to knock 25% off the asset coverage ratio to reflect the Halloween massacre. This ratio is better thought of as being 1.78:1, not 2.38:1. DBRS lists many of the issues as being under review. Find out why the issues are being reviewed from their website and determine for yourself whether you are comfortable with the idea of investing in the companies. Note that sometimes a review can be favourable! Exchange (who signal their agreement with the designation by listing the issue with a .PR. insertion into the ticker symbol) and DBRS (who will assign a credit rating on the Preferred Shares, Pfd- scale)even if the only purpose of understanding them is to avoid them. My firms analytical software, HIMIPref, tracks a number of interest-bearing preferred issues (usually distinguished from the dividend-paying preferred shares by referring to them as preferred securities). Interest-bearing issues are, sadly, often too illiquid or too short term for purchase, but some investors with particular requirements may often be rewarded for poking around in the Toronto Stock Exchanges bargain bins. Chart 1 below shows a graph of Yield-to-Worst vs. Modified Duration for the interest-bearing issues tracked (see July 2006 Canadian MoneySaver for an explanation of Yield-toWorst) and makes it readily apparent that there are some attractive yields on offer6% interest income for investmentgrade paper might strike some as being an attractive rate, especially now at the height of RRSP season! After checking the DBRS credit ratings (obtainable from www.dbrs.com), as explained in the October issue, and examining financial statements obtained from SEDAR at www.sedar.com, we can prepare a summary such as Table 1. This table reviews the credit characteristics of the issues plotted in Chart 1 and is similar to our review of split shares in the November/December 2006 MoneySaver. We should note that: TA.PR.C has a credit rating of only Pfd-3. As a general rule, I do not recommend investing in preferreds (either dividend or interest paying) of this quality. These are the preferred shares equivalent of junk. While they might be attractive, theyre not only more exposed to unforeseen events but, as a related effect, are less well behaved with respect to interest rates in general than are the better quality issues. As fixed-income specialists, lets stick with what we know best! DBRS does not list some of the issues as being under review, although their investment characteristics are similar to those being reviewed. Why is that? Frankly, I dont know, and will review all the ratings with a jaundiced eye given the impairment of asset values since the last financial statement. I have not shown the calculations relating to the operating companies. Credit analysis of operating companies is much more complex than that required for split share corporations. Additionally, I consider the rating agency pronouncements regarding operating companies to be more reliable than for split shares. Table 1 shows no hideous surprises, so we can turn to a
CHART 2 - FCN.PR.A - PRICE/YIELD-TO-WORST SENSITIVITY X-Axis - Bid Y-Axis - Yield-to-Worst (at Bid)
9.6 9.725 9.85 9.975 10.1 10.225 10.35 10.475 10.6 0.0875 0.075
0.625 0.05
0.0375 0.025 0.0125 0 0.0125 -0.0125 -0.025 -0.0375 -0.05
Historical Market Data Source: TSE (c) 1993-2006 The Toronto Stock Exchange. All Rights Reserved.
JANUARY 2007
more detailed examination of Chart 1. BAM.PR.S is plotted as having the highest Modified-Duration-To-Worst of the sample, despite the fact that we know it has been called for redemption (the announcement was made November 16, according to the company website at http:// www.brookfield.com/InvestorCentre/835.html). This illustrates one of the perils of relying mechanically on Yield-toWorst (and hence, on the Yield-to-Worst scenario) as an indicator of investment expectationsit can vary considerably when an issue is trading close to its call price. To determine the Yield-to-Worst for BAM.PR.S, the HIMIPrefsoftware I used in the preparation of this article selected three scenarios from a plethora of possibilities as being sufficiently likely to be worthy of further examination. These scenarios are specified in Table 2 and, it should be remembered, are prepared without specifying that we know the issue will be called for redemption effective January 2, 2007. We note that the calculated yields seem very high, as the yield of the instrument is only 8.35% but it must be borne in mind that this issue was quoted with a bid of $25.32, despite the fact that a dividend of slightly over $0.52 was to be earned, in its entirety, on the next exdividend date of 2006-12-13. Since an entire three-months worth of interest will be earned in its entirety less than two weeks from the date of the calculation, yield calculations can return surprising results when performed for short holding periods. A Yield-to-Worst calculation utilizes only the price, maturity date, and cash flows of the issue examined. It does not automatically include common sense, such as the knowledge that Brookfield can borrow money much more cheaply than 8.35% (and may therefore be expected to call at the first possible instant) and the ability to check the company website, DBRS and news reports. Like any other calculation, it is an aid to understanding, not a substitute.
TABLE 1 - CREDIT CHARACTERISTICS OF SOME PREFERRED SECURITIES Date of Annual Report Common Examined Equity^ 2005-12-31 2005-12-31 2005-12-31 2005-12-31 94,364 56,500 39,231 70,400
TABLE 2 - BAM.PR.S : SCENARIOS EXAMINED FOR YIELD-TOWORST ANALYSIS Maturity Date 2007-1-30 2007-6-29 2036-11-30 Maturity Price $25.00 $25.00 $25.14* Yield to Maturity 9.05% 8.62% 8.45%
*This is a limit maturity - a 30-year term used for analytical purposes by HIMIPref. In such a case, the maturity price reflects the current price, with a separate computation of the final income payment.
Market risk is often exacerbated by the potential for an early callsee the references to redemption in the June 2006, MoneySaver. Many issues have a call price of par, exercisable by the company once per year, every year. Such schedules are not in the best interest of the preferred shareholders. It means the price of the issue can never rise too high, since it is anchored by the possibility of such a call in the near termthe yield will drop very quickly as the price rises. While we are not necessarily looking for capital gains when we purchase preferred issues, we wont necessarily turn them down, either! And a premium to our purchase price will, if the issue is called, help compensate for the time and trouble we have to take in order to find a new investment, as well as making it somewhat less likely that the capital unit holders will retract their holdings in the first place. For a graphic depiction of how quickly yield can go negative when the price rises, see Chart 2, in which yield is plotted against price for FCN.PR.A, one of the issues examined in this article. It is clearly the height of lunacy to pay more than about $10.20 for this issue (including commission!), but the TSX reports a 52-week high of $10.70. Note that FCN.PR.A may shortly be merged by the manager into a larger trustsee my blog at http://
Net Normal Income, before Preferred Dividends^ 7,057 6,478 4,244 14,468 5,927 15,195
Ticker BAM.PR.T BSD.PR.A ENB.PR.D
Type of Company Operating Split Operating
Preferred Share Capital^ 68,423 47,538 18,665 123,000 53,166 72,363
Asset Coverage Ratio 2.38:1 2.19:1 3.1:1 2.4:1 2.3:1 2.6:1
Preferred Income DBRS Share Coverage Credit Dividents^ Ratio Rating 3,665 3,385 5,722 7,688 4,446 5,092 1.92:1 1.91:1 0.74:1 1.88:1 1.33:1 2.98:1 Pfd-2(low) Pfd-2(low) Pfd-2 Pfd-2 Pfd-2 (Under Review) Pfd-2 (Under Review) Pfd-2 (Under Review) Pfd-2(low) Pfd-2(low) (Under Review) Pfd-3
BAM.PR.S* Operating
FCF.PR.A** Split FCI.PR.A** Split FCN.PR.A** Split MST.PR.A STW.PR.A TA.PR.C* Split Split Operating
2005-12-31 169,297 2005-12-31 113,629
^ Thousands. *By the time of publication, both BAM.PR.S and TA.PR.C will have been called. They have been included in this review of the situation as of November 30 for completeness. ** There is an outstanding proposal to merge FCF.PR.A, FCI.PR.A and FCN.PR.A.
Canadian MoneySaver
JANUARY 2007 25
www.prefblog.com/?p=377 for details. Issues discussed in this article with a call premium that declines over time, which is the ideal we should look for when examining any issue, are BSD.PR.A, MST.PR.A and STW.PR.A. The first mentioned of that triumvirate recently had an annual retraction. No preferreds were called because the company was able to purchase enough in the marketplace at prices well below the call price, which is exactly the way it should be. Interested readers may read my blog, at http:// www.prefblog.com/?p=372 for more details and commentary. So there you have it! Preferred securities pay interest and
can be a rewarding addition to your list of potential investments, particularly for RRSPs. But you must: check the credit quality; check the Yield-to-Worst; check the potential for an early call; and dont pay too much! James Hymas, CFA, Hymas Investment Management, 129 Humbercrest Blvd, Toronto, ON, M6S 4L4 (416) 6044204, jiHymas@himivest.com. James specializes in preferred share analysis.
Am I Going to Be Okay?
Achieving Financial Comfort in Todays World

Francis DAndrade
ne of the most widely accepted theories of human motivation was advanced by psychologist Abraham Maslow. He presented his hierarchy of needs, not as a finished work, but as an untested theory that he hoped others would take up and develop further. Maslow believed that humans are motivated by needs, but he also believed that some needs are more urgent than others. In Maslows hierarchy of needs, we take care of our basic needs first and leave the rest for later. Our physiological needs come first: food, water and a hat to keep us warm. For a hungry man, the choice between a sandwich and a BMW is a no brainer in Maslows world. Our safety comes next. We need enough to feel free from harm. The BMW is still a little way off. Third, we need love and companionship. Friendships, marriage, family, and community play a big role in our emotional health and protect us from loneliness and isolation. If all else fails, get a dog. But still no BMW. Maslow referred to these first three basic needs as deficiency needs. You do not necessarily get a big emotional lift from them but if you are deficient you have to go back and fill the vessel before resuming your climb up the hierarchy of needs. We spend much of our time attending to our needs at these three levels. Food, clothing, shelter, friends, a spouse
and a dog. What more can a body want? Esteem, thats what. Esteem involves our ego and the satisfaction we derive from power, prestige, or achievement. Maslow distinguished two levels of esteem; the respect and adoration of others and the higher need of self-respect. A feeling of selfworth is more important than the recognition of others, but its much harder to attain. Do you lease that BMW to impress your friends or buy it because you love good cars? At the fifth and final level comes self-actualization. We need to feel a sense of personal development and express our creativity. According to Maslow, only a few people among us, perhaps as few as two per cent, have the capacity to achieve self-actualization. With respect to a great theoretician, I think self-actualization means feeling comfortable in our own skin, and I think each and every one of us can feel that way. Maslows hierarchy of needs can also apply to the world of personal finance. We all have basic financial needs upon which we build a foundation for our higher needs, which deliver an increasing sense of security and independence. At the first level, we need an income. With an income, we can meet our basic needs and achieve financial independence. At the second level, we need savings. Our savings not only keep us in the game during difficult times, they also provide us with a sense of comfort. Savings represent both
JANUARY 2007
our job security fund and our future fund. Our financial independence depends on fulfilling our needs at the first two levels. We may not die without them, but well certainly diminish our chances of achieving maximum happiness and fulfillment. Next are our higher financial needs which we require for fulfillment and growth. At the third level comes home ownership. A house is the most significant non-financial asset that most of us will ever own. Not only does it satisfy our need for shelter and provide a great place to raise a family, it also provides us with safety, forces us to save, enhances our credit, appreciates tax-free, and protects us against inflation. None of this comes, by the way, from merely buying a house. The trick is to own it. At the fourth level comes retirement. At this stage in life most of us stop working and no longer earn an income. Instead we rely on some form of long-term savings, which we can use to create a stream of income that will sustain us for the rest of our lives. Without these savings, we have to either keep working or live quite modestly. We reach the fifth level, equivalent to Maslows self-actualization, when we achieve financial independence and self-reliance. As Ive mentioned, everyone has a different sense of autonomy and self-reliance and the financial requirements to achieve them. As in Maslows hierarchy, we have to attend to our needs at each level before we can move higher. And as we encounter a setback, we have to satisfy our most basic needs before we resume our progress toward financial independence. Im sure that most people can articulate many financial needs but these are the common needs which I have observed give the greatest number of people the highest sense of security. Excerpt with permission of the publisher Per Capita Publishing. Available at bookstores, ISBN:978-0-9739375-0-3, $18.95. Dales note: After paying off his mortgage and feeling the anxiety which accompanied this experience for him, Francis started thinking about the emotional side of financial security. Today, he helps people gain a deeper understanding of their relationship with money. This book brings forth ideas, often simple ones, that will help the reader feel more secure about money matters. Francis provides practical advice and a simple framework that you can use to achieve a better sense of financial comfort.
Carlyle Dunbar penned an eyeopening piece in the December edition of Investment Executive. I present a portion of the table carried in that item (source: TSX Review).
DIVIDEND WINNERS Big increases this year: % increase in 2006* Corus Entertainment B 760 Teck-Cominco B 150 Shaw Communications B 144 Rogers Communications B 113 Shawcor Ltd. A svs 100 Husky Energy 100 Xceed Mortgage Corp. 100 Home Capital Group 80 BMTC Group A 71 Stella-Jones 60 Russel Metals 60 ING Canada 54 Easyhome Ltd. 50 Ensign Energy 50 Homburg Investment A & B 50 Pulse Data 50 Frequent increases in past seven years Great-West Lifeco IGM Financial Royal Bank of Canada Power Financial Bank of Nova Scotia Bank of Montreal National Bank Shaw Communications B AGF Management Canadian Utilities A & B Reitmans Canada Russel Metals Sun Life Financial Toromont Industries
MoneyTips
Increasing Dividends
Number of increases** 14 14 13 12 12 11 10 9 8 8 8 8 8 8
*To the end of October **Including increase in 2006 Example: Corus raised its dividend 760%, in 2 steps. Great-West Lifeco raised its payments 14 times since 2000.
MoneyBook
Money in the Bank Saving More of Your Hard-Earned Dollars by Tariq Sean Malik, Money Publishing; $19.95, ISBN: 0-9736506-1-3.
This book is all about stretching your dollars through common sense and savings. It is not an investment book. It is written for the novice who is just starting out on her road to financial comfort. Heres the basics of financial planning which we can all put in place, if we have the will to do so.
JANUARY 2007 27
Canadian MoneySaver
TOP FUNDS RANKED BY FIVE-YEAR RETURN AS OF NOVEMBER 30, 2006. MIN % % RETURN YEAREND INVST RET DEC DEC DEC DEC DEC 3-YR 5-YR SINCE INCEPT DIST DEC DEC NAVPS MGR EXP 5-YR TAX QUARTILE YEAREND DEC DEC DEC ASSET VALUE 12 MTH % CHNG 12 MTH 12 MTH
FUND NAME
LOAD
YTD
2005
2004
2003
2002
2001 RETURN RETURN RETURN EFFCY
FREQ
2005
2004 2003
2002 2001
$ MILL
ASSETS
NOV06
HIGH
LOW
TENURE RATIO
-9.2
87.6
45.8 3.8 70.2 -47 5 224 17 17 24
13 35
16.8 17.9 1.6 15.0 14.2 16.2 7.6 15.6 15.3 15.3 12.6 -8.7 -10.5 -32.0 4.2 -11.2 7.2 6.9 6.9 -5.6 96.0 137.4 20.5 62.2 435.4 247.5 317.1 78.1 98.5 100.0 93.5 95.0 3 3 4 1 4 1 1 1 21.1 33.8 36.9 18.6 8.9 19.3 19.5 25.5 25.2 25.2 20.2 12.6 30.8 17.2 10.2 12.8 19.5 10.1 15.7 15.3 15.3 12.6 62.2 -8.4 40.7 -21.7 22.9 9.5 53.9 -9.5 81.9 -18.2 27.3 -1.2 43.3 0.3 23.5 0.3 23.2 0.0 23.2 0.0 22.9 -11.4 18.4 30.6 20.7 16.0 14.4 21.0 14.1 20.8 20.5 20.5 17.0 20.0 18.9 17.6 17.0 16.9 16.8 16.6 16.5 16.2 16.2 11.3 17.1 14.1 10.1 13.3 16.1 13.5 10.8 13.2 12.9 12.9 11.9 Qrtly Qrtly Annual Qrtly Annual Qrtly Annual 2 1 1 3 4 3 3 1 1 1 3 1 1 4 3 1 4 1 1 1 1 1 2 1 1 1 1 1 2 2 2 4 1 2 4 1 1 1 1 1 25.94 43.99 12.46 25.77 18.51 34.36 22.01 30.34 29.66 29.66 25.94 43.99 13.21 25.77 20.74 34.36 22.49 30.34 29.66 29.66 22.41 37.30 11.51 22.40 16.21 29.65 20.14 26.25 25.72 25.72 13.7 5.8 3.1 8.0 4.7 12.4 9.2 8.8 8.8 8.8 0.15 1.36 2.76 2.91 2.51 1.50 3.75 1.86 2.13 2.13 2.45 7.3 23.5 23.6 -46.4 20.9 25.8 26.7 29.0 4.4 97.2 1 1 4 1 1 1 1 35.8 13.1 19.8 10.1 47.6 16.7 8.4 8.1 10.8 9.0 12.6 19.9 33.9 32.4 24.4 45.0 22.8 24.8 24.7 18.0 21.6 20.4 25.6 23.5 25.0 19.7 23.5 23.5 18.0 17.6 29.5 9.7 16.3 66.7 45.8 43.9 51.3 62.2 15.9 36.4 34.1 26.1 70.2 33.7 9.6 27.2 20.7 28.4 -26.4 34.8 25.8 25.7 23.5 3.0 -2.2 29.6 25.3 27.8 20.5 41.1 22.2 18.7 18.2 21.1 14.5 18.1 32.5 30.3 29.5 27.2 27.1 24.5 24.1 23.4 23.1 22.6 16.4 15.1 30.5 22.0 14.0 13.3 23.6 14.5 13.4 15.1 18.6 14.4 98.2 92.4 92.2 97.3 100.0 87.8 94.8 97.6 99.0 Semi Annual Annual Annual Annual Annual Annual Annual Annual 2 1 1 2 1 2 2 2 3 2 1 1 1 2 1 1 2 2 1 3 1 1 1 1 1 4 2 2 3 1 1 1 1 1 4 1 1 1 1 1 2 615.1 194.5 120.5 231.4 15.4 57.7 283.0 335.0 178.9 4.0 149.6 63 47 15 8 103 23 26 28 1 -3 110.47 110.47 27.18 28.83 35.70 35.70 34.28 34.69 20.89 21.30 30.60 30.60 18.00 18.42 30.05 30.93 42.63 42.63 17.97 18.64 80.33 25.53 29.15 30.79 14.15 25.92 16.31 27.36 37.83 16.33 13.5 5.2 7.8 12.1 2.8 4.9 9.1 9.7 9.9 1.8 1.67 2.50 2.57 2.62 1.90 3.72 2.74 2.49 1.50 2.65 2.62 4.8 -13.2 98.5 99.8 97.1 Qrtly Annual 1 4 0.0 14.8 0.8 2.1 3.8 Semi Annual 99.9 96.6 Annual 81.6 Annual 96.4 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 1 4 4 4 1 3 2 2 23.4 27.9 22.2 29.0 29.0 29.0 8.5 19.2 25.1 18.5 8.7 10.1 28.2 28.4 26.4 26.4 26.4 30.0 27.2 26.5 31.0 12.1 21.3 22.9 16.7 24.9 24.9 24.9 14.9 16.9 22.4 22.0 13.6 67.2 40.3 35.6 32.5 32.5 32.5 25.0 34.7 28.7 24.3 24.2 0.6 -14.5 -6.2 -15.2 -15.2 -15.2 8.2 -6.7 -14.8 -12.6 -4.9 20.2 29.0 23.8 29.4 29.4 29.4 19.9 22.1 27.2 25.8 12.8 23.9 19.6 19.2 19.0 19.0 19.0 18.0 17.9 17.2 16.3 11.5 17.5 16.2 11.7 19.2 19.2 15.7 16.3 13.3 12.6 11.5 9.7 2 2 168.3 230.3 1401.3 119.8 69.3 11.7 1505.3 44.8 574.7 53.0 130.4 77 250 15 152 132 -9 -10 51 57 -30 25.50 11.93 27.73 17.01 17.01 17.01 45.45 10.36 37.62 13.62 25.50 11.93 27.73 17.01 17.01 17.01 45.45 10.36 37.62 21.36 20.67 9.33 22.57 13.18 13.18 13.18 41.88 8.63 29.97 13.62 6.2 3.8 7.8 4.9 4.9 0.5 13.7 5.8 3.8 8.4 2.91 3.71 3.09 3.08 3.08 3.08 0.21 3.07 2.56 1.82 2.61 -10.5 -15.8 26.1 24.1 17.1 37.7 -12.1 -12.9 -13.1 3.8 100.0 98.7 91.8 94.4 90.9 93.1 Annual Annual Annual Annual Annual Annual 4 4 1 1 2 1 3 4 4 96.5 96.4 Qrtly 16.5 7.7 17.5 14.2 2.0 12.3 7.8 8.6 8.4 9.2 8.7 17.6 19.3 16.6 12.0 15.7 5.9 19.4 19.8 19.6 19.8 12.1 20.6 34.5 21.4 17.4 13.4 17.6 15.4 15.7 15.5 15.0 13.6 67.9 42.4 23.5 38.4 11.6 17.5 28.0 27.8 27.5 23.8 24.2 -12.3 0.2 7.6 4.7 31.8 7.2 -4.2 -4.0 -4.2 -5.4 -4.9 21.3 21.6 21.2 16.1 11.2 13.1 15.8 16.4 16.1 16.2 12.8 21.5 20.9 19.5 18.7 15.4 14.0 14.0 14.0 13.8 13.5 11.5 9.5 11.8 17.7 11.3 12.1 13.4 10.9 13.5 13.2 8.5 9.7 1 1 2 3 2 4 1 1 1 1 1 1 1 2 2 1 2 1 1 2 1 1 2 1 4 3 1 2 2 2 4 2 1 1 1 1 3 3 3 3 189.8 91.2 810.0 305.2 313.3 238.6 244.2 76.9 63.4 27.4 130.4 10 47 31 24 9 -9 26 12 8 66 13.45 13.53 11.42 12.92 12.94 12.00 22.46 22.46 19.12 27.60 27.82 23.94 32.35 33.11 30.73 10.72 10.72 9.43 23.77 25.34 21.57 622.11 663.97 564.74 609.44 651.26 553.44 14.83 15.62 13.31 4.1 0.9 17.7 20.9 20.1 5.9 8.3 9.0 9.0 5.8 2.90 2.38 2.00 1.86 1.75 2.53 2.92 2.74 2.96 2.84 2.61
CANADIAN EQUITY Acuity Pooled Cdn Equity 150000 None Assumption/MB TSX 100 Momntm A 500 None Middlefield Growth 1000 F or B Acuity Cdn Equity 500 F or B Marquest Cdn Equity Growth 50000 None Leith Wheeler Cdn Equity Series B 25000 None Halcyon Hirsch Opportunistic Cdn 1000 F or B IA Dividends 100 None IA Ecflx Dividends 100 IAP Ecflx Dividends^ 100 AVERAGE CANADIAN EQUITY
CANADIAN SMALL/MID CAP EQUITY Sceptre Equity Growth 5000 None Norrep II# 10000 FnDf Norrep# 20000 Front Northwest Specialty Equity 1000 F or B Mavrix Strategic Small Cap 150000 None Bissett Microcap Class A# 500 F or B Ethical Special Equity 500 F or B Clarington Cdn Small Cap A 500 F or B Mawer New Canada# 5000 None Maritime Life Cdn Grwth Ser II R# 500 FnDf AVERAGE CDN SMALL/MID CAP EQ
F or B F or B F or B
CANADIAN ANCHORED EQUITY Acuity All Cap 30 Cdn Equity 500 Dynamic Cdn Value Class 500 Dynamic Power Cdn Growth 500 IA Ecflx Cdn Equity (Dynamic) 100 IAP Ecflx Cdn Equity (Dynamic) 100 APEX Cdn Value (Dynamic) 1000 United Cdn Equity Value Pool 25000 Dynamic Power Cdn Growth Class 500 Dynamic Value Fund of Canada 500 Thornmark Enhanced Equity 150000 AVERAGE CDN ANCH SM/MID CAP EQ
F or B F or B F or B F or B None
CANADIAN ANCHORED SMALL/MID CAP EQUITY Dynamic Power Small Cap 500 F or B CI Can-Am Small Cap Corporate Class 500 F or B ABC Fundamental-Value 150000 None Saxon Small Cap 5000 Front Chou RRSP 10000 Front Trimark Cdn Small Companies# 500 F or B London Life Mid Cap Canada(GWLIM) 300 Defer Great-West Life Mid Cap Canada(G) B 50 Defer Great-West Life Mid Cap Canada(G) A 50 None Quadrus GWLIM Cdn Mid Cap 500 F or B AVERAGE CDN ANCH SM/MID CAP EQ
Top Funds
JANUARY 2007
TOP FUNDS RANKED BY FIVE-YEAR RETURN AS OF NOVEMBER 30, 2006. % RET DEC DEC 3-YR 5-YR DIST DEC DEC NAVPS MGR EXP % RETURN YEAREND DEC DEC DEC SINCE INCEPT 5-YR TAX QUARTILE YEAREND DEC DEC DEC ASSET VALUE 12 MTH % CHNG 12 MTH 12 MTH
MIN INVST
Canadian MoneySaver
YTD 2005 2004 2003 2002 2001 RETURN RETURN RETURN EFFCY FREQ 2005 2004 2003 2002 2001 $ MILL ASSETS NOV06 HIGH LOW TENURE RATIO 7.2 8.2 5.7 11.4 12.6 4.4 4.2 3.7 4.1 4.1 8.2 0.0 88.1 19.5 22.5 17.8 13.4 22.2 16.6 12.6 15.7 12.4 12.4 10.7 22.2 15.5 19.0 12.0 21.8 19.9 18.9 18.9 18.8 18.8 8.9 37.0 43.7 32.2 38.6 19.9 22.6 19.2 21.6 18.5 18.5 13.1 7.3 0.8 4.2 2.2 1.8 8.3 12.1 7.5 11.8 11.8 -5.1 12.5 10.8 9.6 -0.9 4.9 15.0 18.4 17.9 16.7 15.7 13.5 21.5 15.2 13.2 14.3 13.1 13.1 10.6 18.9 18.2 16.0 15.7 15.6 14.7 13.9 13.8 13.6 13.6 7.3 13.8 11.0 9.0 12.7 13.7 12.2 11.1 13.9 13.9 13.9 8.0 76.4 75.5 77.8 84.1 84.1 77.8 90.0 Qrtly Qrtly Qrtly Qrtly Annual Mthly Mthly Mthly 1 1 1 2 1 1 2 1 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 1 1 1 1081.4 123.8 1862.5 18.5 28.5 4299.2 1356.6 13.1 1132.3 1132.3 359.9 35 71 40 45 -19 11 3 -4 30 30 21.00 16.89 16.86 18.86 17.53 15.38 15.77 19.43 21.58 21.58 21.61 16.89 17.43 18.86 20.04 16.05 16.14 20.13 22.01 22.01 20.02 15.76 16.09 17.21 17.53 15.26 15.38 18.74 20.69 20.69 13.7 13.7 14.9 13.7 7.9 1.7 9.2 1.7 1.8 1.8 0.10 0.10 2.36 0.18 2.50 1.54 2.19 2.33 2.33 2.33 2.51 0.7 2 -12.3 -14.9 -12.9 -14.3 -12.7 4 4 4 4 4 5.4 35.9 23.3 13.6 11.7 15.2 17.0 15.3 15.2 16.7 14.7 60.6 21.7 30.2 23.2 21.3 23.3 25.9 27.0 23.0 25.5 23.0 29.4 -8.9 14.8 19.3 21.6 14.0 13.6 13.6 13.6 13.3 13.5 24.2 13.8 29.0 27.2 27.8 26.6 25.2 25.2 25.6 24.6 25.9 11.7 42.8 -9.6 -3.0 -11.5 -12.3 -14.1 -14.1 -12.9 -14.2 -12.8 34.7 13.1 25.8 19.6 20.2 19.3 20.6 20.4 19.0 20.3 18.8 26.1 20.6 18.7 16.1 14.6 13.3 13.1 12.9 12.8 12.7 12.7 22.9 23.7 10.8 15.7 10.6 9.0 10.5 9.7 12.1 10.2 9.3 98.6 99.7 99.1 93.5 96.2 94.8 93.2 92.5 97.0 96.2 96.6 Qrtly Qrtly Annual Qrtly Qrtly Annual Qrtly Qrtly Annual Annual Annual 1 3 2 1 2 1 1 1 2 1 1 1 1 2 1 1 2 2 2 2 2 2 4 4 2 1 1 1 2 2 1 2 1 3 4 2 1 2 3 3 3 3 3 3 526.0 941.9 76.2 481.3 234.5 818.0 8159.6 398.6 472.9 170.0 818.0 21 51 65 -23 7 9 14 16 4 27 9 83.25 85.35 17.46 52.26 86.23 21.17 73.60 80.48 23.75 20.54 20.35 91.09 85.35 17.46 52.26 86.23 21.17 73.60 80.48 23.75 20.54 20.35 77.07 62.79 13.72 45.59 78.44 18.32 63.67 70.97 20.55 17.32 17.68 4.4 4.4 6.2 4.4 4.4 1.3 4.4 4.4 8.1 0.8 1.3 0.55 0.55 1.28 0.55 0.55 0.31 0.17 0.25 0.71 0.54 0.88 89.0 100.0 89.8 89.7 90.2 100.0 Annual Annual Annual Annual Annual Annual Annual Annual 98.6 100.0 100.0 Annual 97.1 6.2 5.8 5.9 5.9 13.9 17.9 5.6 10.6 18.2 16.4 12.6 12.5 12.0 12.1 12.1 -1.6 22.7 11.8 11.8 18.7 20.5 6.3 12.4 11.6 11.9 11.9 11.8 9.3 11.5 14.4 6.3 7.9 4.6 35.2 -13.8 13.1 35.5 -13.3 8.4 34.7 -14.1 12.6 34.6 -14.2 12.7 30.9 -7.9 -6.3 13.9 -17.5 -7.9 34.2 -14.6 13.0 25.7 -16.2 17.2 -18.4 12.7 -18.4 -9.1 10.5 -20.4 -10.7 12.3 11.6 11.9 11.9 9.6 19.3 11.5 14.1 16.8 17.5 9.5 10.0 9.7 9.6 9.6 9.2 9.2 9.2 8.9 8.0 7.7 2.4 15.7 8.9 9.2 13.7 7.0 8.0 10.6 9.4 5.7 5.8 5.5 1 1 1 1 4 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 1 1 1 1 2 1 1 1 2 1 1 1 1 1 2 1 1 2 2 1 1 1 1 1 2 1 2 343.0 659.2 19.1 5878.2 9.1 360.6 53.9 40.2 61.8 8.1 152.1 1 48 1 62 16 105 48 236 163 -19 25.70 16.85 28.12 10.50 12.02 18.54 10.31 8.25 6.90 7.66 25.70 16.85 28.12 10.50 12.02 18.54 10.31 8.25 6.90 7.66 24.13 15.82 26.43 9.86 10.51 15.73 9.70 7.46 5.84 6.58 31.9 5.2 31.9 31.9 7.5 10.8 31.9 5.8 5.8 10.8 2.14 2.54 2.51 2.48 2.42 2.75 2.82 2.63 3.54 4.55 2.85
FUND NAME
LOAD
CANADIAN PORTFOLIO Acuity Pooled High Income Acuity Pooled Conserv Asset Alloc Acuity High Income Acuity Pooled Cdn Balanced Thornmark Dividend & Income CI Signature High Income Elliott & Page Monthly High Income CI Signature High Income GIF Class B MLI E&P Mthly Hi Inc GIFe S2 MLI E&P Mthly Hi Inc GIF S2 AVERAGE CANADIAN PORTFOLIO
150000 150000 500 150000 150000 500 500 500 2500 2500
None None F or B None None F or B F or B F or B F or B F or B
500
INDEX FUNDS iShares CDN Energy Sector Index iShares CDN Gold Sector Index CIBC Emerging Markets Index iShares CDN Financial Sector Index iShares CDN S&P/TSX Midcap Index TD Cdn Index - e iShares CDN S&P/TSX 60 Index iShares CDN Composite Index RBC Cdn Index Altamira Precision Cdn Index TD Cdn Index - I
100
1000 1000 100
None None None None None None None None None None None
GLOBAL EQUITY Mac Cundill Value Series A# Mac Cundill Value Class Mac Cundill Value Series B# Mac Cundill Value Series C Tradex Global Equity* Dynamic Global Value Mac Cundill Value Segregated Synergy Focus Global Equity Dynamic Global Value Class Dynamic Protected Global Value# AVERAGE GLOBAL EQUITY
5000 500 2500 500 1000 500 500 500 500 1000
Front F or B Front F or B None F or B F or B F or B F or B F or B
Top Funds
CHART NOTES: Morningstar has made significant changes to their fund categories. Morningstar states: The changes made to the categories are intended to enforce an even greater degree of mandate purity. This means that funds must be even more similar before we will place them into the same category. For a full explanation visit http://www.morningstar.ca/categories. Additional categories are offered at http://www.canadianmoneysaver.ca/rc_charts.aspx for all members. n Year Return - The average annual compound (annualized) rate of return the fund has performed over the last n years. It assumes re-investment of any dividend or interest income. 1 Year Return (Yr 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 funds 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. YearEnd Quartiles - The quartiles (1 to 4) give the individual fund its position relative to all others in the fund type category. For example, if the funds quartile value is 1 for the Dec 2003 yearend, this means the funds rate of return for the 12 months ending Dec 31, 2003 is in the top 25% of all funds in its fund type category. Sales status is open, **reopened, ^part open, #capped or *restricted to qualifying individuals. Source - Morningstar PalTrak, Morningstar Canada, (800) 531-4725, http://www.morningstar.ca. Canadian Portfolio - Some Canadian Portfolio funds tend to vary their exposure to different asset classes in order to capitalize on opportunities in the capital markets. Meanwhile others simply allow their asset weights to fluctuate according to changing market values. In either case these funds do not maintain constant asset weights through time.
JANUARY 2007 29
The Professional Advisor
A Full Suite of ETF Products

John De Goey
or years, some people have lamented the painfully slow rate at which Canadians embraced ExchangeTraded Funds (ETFs). Given the events of 2006, I think its fair to say the Canadian ETF market has hit its stride. On top of the ETFs released by Barclays in the spring of 2006 (Canadian ETF Market Matures, March/April 2006, Canadian MoneySaver) and those released by Claymore later that summer (The Next Step in ETF Development, October 2006, Canadian MoneySaver), we now have another bunch of ETFs coming to Canada to round out the offerings already available. As such, I suspect that 2006 will go down in history as the year that ETFs entered the mainstream of Canadian investment options. Sure, ETFs have been around for years, but 2006 was the year that Canadians essentially got it in terms of looking for cheap, pure and highly tax-effective investment vehicles to build their portfolios. In November, Barclays announced that they were releasing five new iShares into the Canadian marketplace. They are Canadian Long Bond Index Fund (XLB), Canadian Government Bond Index Fund (XGB), Canadian Corporate Bond Index Fund (XCB),Canadian Value Index Fund (XCV), and Canadian Growth Index Fund (XCG). Rajiv Silgardo, the CEO of Barclays Canada, said Investors asked us for iShares funds which provide exposure to more segments of the Canadian bond market, and to value and growth characteristics in the Canadian equity market, and were pleased to satisfy these investor needs with the launch of these new iShares funds. By adding three new bond ETFs to the three they had already released, the people at Barclays feel they can now allow investors to customize the Canadian fixed-income portion of just about any portfolio. The objectives of XLB, XGB and XCB are to provide income by replicating, as much as possible, the performance of the Scotia Capital Long Term Bond Index, the Scotia Capital All Government Bond Index and the Scotia Capital All Corporate Bond Index respectively (net of expenses).
As a result, if one has an opinion on forthcoming changes in interest rates, one could modify the duration of ones bond position quickly and easily. Similarly, if a persons view changes regarding credit spreads or other market-driven events, that person can now act accordingly. Of course, it should go without saying that one could also have a set position on these and other factors and buy a suitable mix of ETFs that are held in virtual perpetuity, too. On the Canadian equity side, the need for style diversification has been obvious since TD left the Canadian ETF market a couple of years ago. The introduction of the XCV and XCG iShares restores the ability for investors to tilt their portfolios based on preferred styles. Specifically, XCV aims to replicate the Dow Jones Canada Select Value Index and the XCG aims to replicate the Dow Jones Canada Select Growth Indexagain, net of expenses in both cases. And if an investor has no strong opinion on these matters, there are already some useful market-neutral ETFs available that would allow for that too. When I mention that ETFs are becoming mainstream investments, Im not just engaging in hyperbole. By the end of the third quarter in 2006, Barclays Canada alone was managing over $66 billion in Canadian assets, including over $13 billion in the TSX-listed iShares. Although ETFs constitute only a little over 2% of the approximately $600 billion Canadian mutual fund market, its still impressive given that there was precious little invested in ETFs in Canada at the turn of the millennium. Given the breadth and depth of products available today, I would only expect that trend to continue. In fact, I expect ETFs to accelerate their trend in capturing a significant share of the Canadian investment product market in the years ahead. The New Year (and the time thereafter) looks bright for ETFs in their bid to capture market share largely because of the excellent spadework that was laid in 2006. John De Goey, CIM, FCSI, CFP, Senior Financial Advisor, Burgeonvest Securities,170 University Ave., Suite 704, Toronto, ON, M5H 3B3 (866) 884-0895 or (416) 2166588, john.degoey@burgeonvest.com. The views expressed are not necessarily shared by Burgeonvest Securities Limited.
JANUARY 2007
Money Sense
Personal File Management Part Two

Brenda MacDonald
n my previous article Personal File Management - Part One (in last months issue) I detailed how to organize and file personal papers to make money management simpler. I would like to continue this month by discussing further organization of paperwork for long-term care and estate planning purposes. In the event of your untimely death or incapacity, your executor and/or power of attorney will need to know where to find important personal information and financial documents. It would be very helpful if you could gather, organize and prepare this information for your loved ones ahead of time. Be very conscious of security when you collect all of this datathere will be a lot of confidential and valuable information that you dont want lost or stolen. I hope you have some room left in your new filing cabinet after last months exercise. If so, set aside a few files to hold the following information: The name, address and phone number for your doctor, specialists, pharmacist and preferred hospital. Contact numbers of all the people you would like to have notified in the event of a major illness or death. Give full names and addresses of relatives and beneficiaries. List names and contact information for informing your lawyer, accountant, employer, insurance agent, minister, neighbours and friends. If you have young children, list contact information for your childs guardian, teacher, babysitter and daycare. Instructions for turning off the security system in your home as well as the location of any hidden keys on the property. Write down the name, address and phone number of anyone who has an extra key to your home or cottage. Make a list of computer passwords for your home computer. The location of financial and other personal records kept within your home. Write down where to find the original copies of your will, power of attorney and any trusts you might have. Record the location of your safety deposit box as well as the location of the key to your safety deposit box.
If you own a business, list the name, address and phone number of your employees. Also leave a schedule and compensation arrangement of people working for you. If you have a long-term care insurance policy, leave information showing the company and agent contact numbers. List the name, address and phone number of your preferred nursing home, retirement home and funeral home. Detail any pre-arrangements that have been made for custodial care. Write down details of your wishes and anything that you have already taken care of or pre-arranged for your funeral. Do you intend to be an organ donor? Would you like to be cremated or buried? Would you like your body embalmed or donated to science? Have you bought a burial plot and headstone? In order to prepare a registration of death for vital statistics and to process a death certificate, the funeral home needs the following data: The deceased persons full legal name, including maiden name if female, Date of birth, Date of death, Birthplace, Social insurance number, Personal health care number, Fathers full name, Mothers full maiden name, The full name of the surviving spouse, if there is one, Occupation, industry worked in and for how long, Religious affiliation. The funeral directors will also need to know if the deceased was a military veteran and would do a means test to determine if the deceased qualifies for any financial aid from the Department of Veterans Affairs for the burial. It is important to have these details on file for your executor. Keep this information up-to-date and make sure your caregiver/executor always has a current copy if changes have been made to anything. It will make their job so much easier if all of the information is readily available to them.
JANUARY 2007 31
Canadian MoneySaver
Every person will have unique needs for their individual circumstances. Im sure there are some things I havent thought of or covered here but Im hoping this will at least get you thinking of your own situation so you actually sit down and start a list. Its not just our parents and elderly friends, neighbours and relatives who need to do this! Brenda MacDonald, CFP, Fee-Only Financial Planner, 112 Harpooner Place, Nanaimo, BC, V9V 1C3 (250) 7560143, macrob@shaw.ca
$2B Man
Charles Larente has $2B dollars of assets under management. He is a Montreal stockbroker with ScotiaMcLeod Inc. Jonathan Chevreau of the National Post reported that Larentes clients invest in individual North American stocks, mostly quality blue chips paying dividends. In fixed income, he focuses on high-quality bonds rated AAA, AA or A, and preferred shares rated P1 or P2.
MoneyTips
Back to Basics
RRIFs The Basics

Kirk Polson
n my return to writing for Canadian MoneySaver in the November/December issue I mentioned that Id get back to basics and initially cover the basics of winding down RRSPs. RRIFs, LIFs, LRIFs, and annuities are popular topics among Canadians in their 60s and 70s. What I hope to do is walk you through your options and provide valuable tips to help you avoid costly mistakes. In the years leading up to retirement its likely youve focused strictly on accumulating wealth and given little thought on how to generate the cash flow youll need in retirement. Most of us reach retirement with three pools of savings:
Registered plans such as RRSPs, or employer-sponsored defined contribution pensions (DCPP) or defined benefit pension (DBPP) plans or deferred profit-sharing plans (DPSP); Non-registered savings which can be in many forms: stocks, bonds, cash, real estate, mutual funds, among others; Government pensions including Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. As retirement income specialists, our role is to help you create the cash flow you need on a tax-efficient basis, as
well as to provide ongoing income strategies, and tax and investment advice during your retirement years. For many clients there is also the objective of preserving wealth for future generations. In the case of RRSPs, there is nothing to stop you from withdrawing money prior to the end of the calendar year in which you turn age 69the point where you are forced to select a retirement income optionand pay the taxes owing. Cashing out has always been an alternative and will continue to be so in the future. Just remember that when you take money out of an RRSP its fully taxable and the financial institution concerned is required to withhold income taxes according to a prescribed schedule, and then pay you the difference. You could owe more tax on filing your annual return, depending on your tax bracket. Its best to think of retirement income vehicles, i.e. RRIFs, LIFs, LRIFs, and annuities as pensions. While there are distinct differences, they all pay you periodic income in retirement, which is just what a pension does. When you convert to one of these vehicles, your RRSP is transferred without incurring any immediate income tax burden, and you pay tax as money is withdrawn. The Registered Retirement Income Fund (RRIF) has been around since 1978 but was not particularly popular until 1986 when significant legislative changes were intro-
JANUARY 2007
duced. At that time Canadians were given unlimited flexibility and control over their retirement income, and the popularity of the RRIF took off to the point where it is by far the most common option chosen today. In rewriting the rules back in 1986, the government made a major change by allowing RRIF holders to withdraw any amount each year, as long as they took out at least the minimum. The minimum payout under a RRIF is based on either your age at the end of each calendar year, or if you make an election, your spouses age. There is an advantage to using a younger spouses age in that the amount you have to withdraw is lower, thereby keeping your taxable income down. Have a look at the table below. It illustrates the percentage of your plan that has to be withdrawn in the year following the age shown.
MINIMUM RRIF WITHDRAWALS Age 69 70 71 72 73 74 75 76 77 78 79 80 81 Payout Percentage 4.76% 5.00 7.38 7.48 7.59 7.71 7.85 7.99 8.15 8.33 8.53 8.75 8.99 Age Payout Percentage 82 9.27 83 9.58 84 9.93 85 10.33 86 10.79 87 11.33 88 11.96 89 12.71 90 13.62 91 14.73 92 16.12 93 17.92 94-100 20.00
There is more to setting up a RRIF than deciding on terms of payment. You must also wrestle with the issue of how to invest your money to create the cash flow you need. Ill go into this topic in the next issue. In the meantime here are a couple of other items that will be of interest.
Pension Splitting
Largely lost in the federal governments October 31st announcement that chopped billions off the valuation of income trusts was a proposal to allow couples 65 or over to split pension income for tax purposes. Currently, with the exception of CPP (Canada Pension Plan) income, Canadians must declare pension income in their individual names. (CPP can be split between spouses when both are age 60 or over.Splitting means that this income can be divided between two spouses so that as a couple they pay less tax than would be the case if one of them declared the full amount.) The proposal will allow the splitting of pension income from employer-sponsored pension plans, RRIFs, and annuities from RRSPs or DPSPs, by Canadians age 65 and over. This will be a huge benefit to couples where one of them has much higher pensions than the other. For example, we still see many older couples where one spouse, historically the husband, has a pension from his employer and his wife has little more than a split of CPP income along with OAS benefits, and perhaps some investment income. This group will be the biggest beneficiaries of this proposal as the spouse with the employer pension will be able to elect to declare up to 50% in the lower income spouses tax return. Some have suggested that this proposal might be the demise of spousal RRSPs which allow a higher earning spouse to build up RRSPs in the lower earning spouses name in order to create pension income on retirement. However, since the new proposal to split pension income is only available at age 65, spousal RRSPs will still benefit those retiring before age 65.
For example, lets say you had your 80th birthday during 2006 and had $100,000 in a RRIF as of December 31st. Then, in 2007, you must withdraw a minimum of 8.75% or $8,750. It doesnt matter whether you take this amount out monthly, quarterly, semi-annually, or annually, you still have to withdraw a minimum of $8,750 in 2007. (Tip: If you dont need the cash flow, postpone your payment to the end of each calendar year to allow your plan to build up. The amount will still be based on the value at the previous December 31st and your age at that time). Now lets also assume our 80-year-old had the foresight to marry a younger spouse, say someone age 70. Then, in that case, it would be wise to elect to have the younger spouses age used to determine the minimum payout percentage, in our example only 5%, or $5,000. So, our 80year-old can postpone $3,750 of taxable RRIF income. And, if our 80-year-old needs more income from her RRIF she can easily withdraw more.
Canadian MoneySaver
Feedback
When I asked for your questions and concerns regarding RRSPs, RRIFs, and annuities in the last issue, I had no idea that Id receive the response that I did. I guess that I should have realized from Canadian MoneySaver members I was bound to get a few dozen e-mails and telephone calls. Thank you. Youve given me some excellent ideas for future columns. I will answer all e-mails, although some of you caught me in a busy period just after the October 31st income trust announcement, so I wasnt very timely in my replies. Returning telephone calls to the far ends of Canada is not always possible. So, if I missed you, I apologize.
JANUARY 2007 33
One thing that is impossible for me to do is to give solutions to individual financial situations by e-mail or telephone. I might be able to give you some general direction or point you to someone with expertise in your province, otherwise its a little bit like trying to get a prescription from a doctor over the telephone. Using our Worry-Free Retirement Experience (see www.worryfreeretirement.com), my associates and I follow a 10-step process that begins with a face-to-face meeting with prospective clients to discuss goals and objectives. We adhere strictly to this approach for both practical and regulatory reasons. Kirk Polson, CFP, CLU,CH.F.C., Fee-Based Financial Planner, Polson Bourbonniere Financial Planning, 7050 Woodbine Ave, Suite 100, Markham, ON (416) 498-6181 or (800) 263-0120 kpolson@pbfinancial.com
In a 2004 study, a York University professor found that rolling over 1-year GICs during the previous 30 years would have produced a negative real after-tax return in non-registered plans. This result would have been achieved by taxpayers with a marginal tax rate exceeding 35.5%. (There was not much difference for 3 or 5-year GICs as inflation and taxes took their toll.)
MoneyTips
Ouch!
The New Retirement
Learning about Life

Patrick Longhurst
ts a while since I contributed a column to MoneySaver, for which I apologize. But that doesnt mean I havent been thinking about you! For most of this year I have been developing financial models for my clients and have come to at least one critical conclusion. We are all different! There are no rules of thumb which adequately cover the planning process. Without getting to really understand an individual, I certainly cannot tell them: How much they need to save before they can retire. What pension option they should select when they do. When is the best time to start RRIFing their RRSPs. While this may not seem like rocket science, it amazes me how much space is taken up in the popular press dealing with the question, How much is enough? When creating a financial model, the first meeting is usually spent: Understanding the clients objectives, both lifestyle and financial;
Collecting data relating to current assets, liabilities, sources of income and basic expenses; Developing expectations for their investment rates of return, the future rates of inflation and their life expectancies; and Discussing future expectations for salary increases, routine and one-time expenses, savings rates and other sources of income. Then comes my big question, What is your primary issue? The typical answer: Does my plan hang together? At the second meeting there is usually an initial feeling of trepidation. Financial projections are not intuitive. Will it be good news or bad? Frequently the news is good. Rather like the traditional peeling of the onion, this spawns a whole group of new questions: Could I actually spend an additional $2,000 per year on vacations? Would it save tax if I split my CPP with my spouse? What if I RRIF my RRSPs at 60 rather than 69?
JANUARY 2007
If the news is bad, there are usually some redeeming features: This retirement age doesnt seem to work, but you could afford to retire two years later. If you could survive with only one car, then things would look a lot better. Are you sure you really want to take those big vacations in your 80s? In other words, the process of financial modeling involves circling around the situation, fine-tuning as you go, until you reach an end state which represents the best estimate of a viable future. I have heard this likened to the Christmas Carol approach where Ebenezer Scrooge is given a vision of his future. But the vision may change if Scrooge can mend his ways! The biggest surprise for many individuals is the impact that government benefits (CPP/QPP and OAS) can have on their financial situation. Many seem to discount these benefits and to assume that they will not be there when they need them. I take a far more positive approach. I believe that the 1998 changes to the Canada Pension Plan really reinforced the funding of these benefits. Also, while the OAS is subject to a clawback for high-income earners, many of us will never reach the threshold income for the clawback (currently around $62,000) and will receive the full benefit. The biggest surprise for me is that everyone does not lead their lives the way that my wife and I do! For example, in our household we have a joint account which pays all day-to-day bills. I have discovered that many couples have separate bank accounts and complex formulae which dictate who pays for what. Neither approach is right. It is just one of the interesting differences which makes every situation unique.
Most provinces have additional, means tested, programs to supplement the incomes of low-income Canadians. The provinces, acting together (with the exception of Quebec) are responsible for the Canada Pension Plan, which is then administered by the federal government. Quebec is responsible for the Quebec Pension Plan. Registered Pension Plans are supervised by the provinces, except for those which fall under federal jurisdiction. RSP contribution rules are established by the C a n a d a Revenue Agency. At the present time it does not appear that a wide-ranging pension review is on the agenda of the federal government. Individual provinces are making changes to their Pension Benefits Acts, but these changes are still piecemeal, rather than being integrated to cover all the elements of the system. With the baby boomers aging, it would be short sighted to wait until this situation becomes a crisis. If this concerns you, I suggest you write to your local MP and MPP/ MLA.
Recent Proposals on Income Splitting

While Finance Minister Jim Flaherty was dropping his income trust bombshell, there were other, less publicized, proposals in his paper. One of particular interest to me was the suggestion that, starting in 2007, individuals will have the ability to split their pension income with their spouse for tax purposes. For those under 65, the income must be a lifetime annuity payment under a Registered Pension Plan (either defined benefit or defined contribution). For those over 65, the income can also be from a RRIF, an RRSP or a Deferred Profit Sharing Plan (DPSP). My understanding is that this is not cash sharing, as in the sharing of the Canada Pension Plan. Rather, it is a device for transferring income from one spouse to the other for tax purposes only, i.e. a paper transfer. For those of you who are actively planning for your retirement years, this may be a significant issue, assuming that it is passed into law. Many of us have had to resort to the use of spousal RRSPs to create some income splitting in retirement. Now we have a potential new tool, which will be particularly attractive for members who are planning to retire early under an RPP, and to take a lifetime benefit. Keep an eye open to see if this actually becomes legislation. Patrick Longhurst, President, Patrick Longhurst Advisory Services Inc, Toronto, ON (416) 815-7200, plonghurst@plasi.ca
The Future of our Pension System

Over the last few months I have also had the privilege of being the national speaker for the Canadian Pension and Benefits Institute. This has given me the opportunity to visit various cities and present my chosen topic, The Future of the Canadian Retirement Income System. My starting point is that the major building blocks of the system have all been in place since the 1960s. My question to the audience is whether it is reasonable that this structure can still be the best solution for Canada, given the economic, demographic and political changes which have taken place in the last forty years. I am not pre-judging the answer, but I do believe that it is worth asking the question. Of course, the major issue is, Who should get the ball rolling? Given Canadas multi-layered approach to pension provision, this is not obvious: The federal government is responsible for OAS and GIS.
Canadian MoneySaver
JANUARY 2007 35
Family Wealth Planning
Planning For The Disabled

Ed Arbuckle
hat Churchill said about the actions of Russia most of us can say about planning for the disabled: It is a riddle wrapped in a mystery inside an enigma. Although I have practiced taxation for many years, I have never totally come to grips with planning for the disabled because I just dont fathom the details. I have a grandson, Damon, with a perfect personality and a heart as big as a house but with some disabilitiesso that has made me determined to master this arcane subject. I have read everything that I can put my hands on about this topic but opinions on most things varysometimes disagreeing and usually confusing. In my quest to put it all together, I purchased a copy of a book published by the Ontario Federation for Cerebral Palsy, Removing the Mystery - An Estate Planning Guide for Families of People with Disabilities. I called the Federation and found them to be extremely helpful. I read their book from cover-to-cover and it moved my knowledge further along. Then I called Dale Ennis and agreed to author three or four articles for you on the subject. So, here we are. I have always had some nagging questions about Henson trusts (a pivotal mechanism in funding the needs of the disabled) and took the opportunity to call Graeme Treeby of The Special Needs Planning Group and author of the cerebral palsy book. Graemes website is www.specialneedsplanning.ca. He answered my questions and indicated that he would be glad to edit my MoneySaver articles. I have taken him up on that, so there are now two hands in this basket. These articles will be based on Ontarios law and may have different applications in other provinces. When I talk to parent and sibling relatives about planning for the disabled, their eyes glaze over. I think a major problem is that planning techniques espoused by advisors are not sorted into understandable bites. There is no road map to show how they relate to each other. And then there is also the problem of interpretation of rules and regulations based partially on the law itself but more so on government interpretations and dicta. When people write about planning for the disabled they
unfortunately provide fuzzy interpretations. And there is the problem of talking to someone in government who is more than likely giving information from guidebooks. So more fuzz comes into the picture with wiggle room and, of course, you should get legal advice. I will try to remedy these barriers by breaking the many issues down into manageable parts with understandable explanations. People with disabilities are likely to get financial help or tax relief in three different ways: Tax credits and other tax relief under the Income Tax Act, Income from the Ontario Disability Support Program (ODSP), and Good planning that maximizes these tax incentives and ODSP benefits. The definition of a disabled person for Ontario disability benefits is similar but not identical to the definition in the Income Tax Act. Graeme Treeby indicates that the medical requirement of being disabled requires that the individual be unable to function independently in various aspects of his or her life. The ODSP Act defines a person with a disability as follows: A person who has a substantial physical or mental impairment that is continuous or recurrent and expected to last one year or more, The direct and cumulative effect of the impairment on the persons ability to attend to his or her personal care, function in the community and function in a workplace, results in a substantial restriction in one or more of these activities of daily living, and The impairment and its likely duration and the restriction in the persons activities of daily living which have been verified by a person with the prescribed qualifications. The Income Tax Act defines a disabled person slightly different in three ways, any one of which qualifies a person for income tax credits: You are blind, even with the use of corrective lenses or medication; You are markedly restricted in the basic activities of daily
JANUARY 2007
living (walking, speaking, hearing, dressing, feeding, elimination, perceiving, thinking and remembering); or You need and must dedicate a certain amount of time specifically for life-sustaining therapy. Notice that you need to meet all three qualifications for ODSP assistance but only one of the criteria for income tax credits. We now at least know how disabled people are defined under both acts. Future articles will move forward to discuss the important issues. We invite readers to send your questions so that the following articles will give a full venting of issues that are troubling folks with a disabled family member. Ed Arbuckle, FCA, CFP, TEP, Personal Wealth Strategies, Fee-Based Family Wealth Planners, 205-30 Dupont Street E., Waterloo, ON (519) 884-7087 or (877) 883-3970, jea@finplans.net
MoneySaver Events
The activities listed here are those attended by Dale Ennis and other MoneySaver staff. MoneySaver does not make transcripts available for any of its seminars.
Get in the Game!

The winner of the 2006 Challenge Game was the Saanich/Victoria Club. The final results are posted on the ShareClub page of CanadianMoneySaver.ca. We congratulate all those who participated. Challenge Game 2007 closes on November 30, 2007. You can participate in the Game by selecting the top three Clubs that will be in the winners circle. To assist your decision making, the portfolios of each member Club plus the standings are posted on the MoneySaver website at http://www.canadianmoneysaver.ca/ce_sharec.aspx. No other data will be provided. To complement your effort, a gift of a Canon digital camera is offered for the first entry received that provides the names of each of the three winning Clubs in rank order, i.e. first, second and third place finishes. The second gift of a one-year online membership to Canadian MoneySaver will be awarded to the next ten participants for naming the top three Clubs, not necessarily in rank order. First received entries will take precedence in the selection of winners. Contest entries must be submitted to the Challenge Game trustee no later than March 2, 2007. It must be understood that each Club may choose to rebalance the initial portfolio according to the Game rules. Contest submissions are made to the Challenge Game trustee (Alex Kobelak) by e-mail at kobe031@shaw.ca and must be received before midnight on March 2, 2007. Only one entry per contestant will be accepted. Your full name, mailing address and e-mail is required with your entry.
Saturday, January 27, 2007 is the date for our next one-day investment conference. It will be held during the four-day Financial Forum trade show at Metro Torontos Convention Centre near the VIA station. Our theme Investing for Your Future succinctly describes the practical focus for the day. For complete details, see pages 41 and 42. Canadian MoneySaver is sponsoring 2 seminars at Torontos Financial Forum. On Friday, January 26 at 3:15pm in the Headline Theatre, Richard Kang will discuss ETF-Based Portfolios: From Basic to Complex - Exchange-Traded Funds (ETFs) have grown globally both in numbers and by asset size. ETFs now exist for everything from basic exposure to Canadian equities to specialized sectors like nanotechnology. Nearly every asset class is covered and if not, an ETF is likely in the works. This allows any investor to build a portfolio with any degree of sophistication. Richard will start from basic portfolios and gradually move to strategies associated more with hedge funds. On Sunday, January 28 at 3:15pm in the Headline Theatre, John De Goey offers a seminar on Working Together - Hows the relationship between you and your advisor? Later this year, the Client Relationship Model will be coming into effect. Will you and your advisor be ready? What sorts of things can be done to ensure your relationship is mutually beneficial and that the responsibilities and expectations of all parties are clearly documented, current and compliant? Well look at compensation disclosure, real and perceived conflicts of interest, investment policy statements and letters of engagement. These seminars are free by registering with Financial Forum. We look forward to chatting with you. Join MoneySavers
in San Miguel de Allende, Mexico for our lifestyle conference on November 12-14, 2007. See page 38 for further details. Our website also offers more background information.
Canadian MoneySaver
JANUARY 2007 37
San Miguel Lifestyle Conference
LIMITED SPACE. ACT NOW.
oin other MoneySavers at our lifestyle conference from November 12-14, 2007 in San Miguel de Allende often called the jewel in the crown of colonial Mexico.
in San Miguel. Dianne is a 13-year, full-time resident in the city and visited it since the early 70s.
Fernando Gonzalez Lloyds manager will outline various

financial services available to residents of Mexico. Hell focus on investment funds and banking services for daily living.
Accommodation/Services We have chosen 3 properties within easy walking distance of the best restaurants, galleries, shops, entertainment and the Jardin (the social centre of San Miguel) as our accommodation sites. All 3 properties are within a block of each other and are highly recommended. The 2 Casa Luna locations (5 stars) have a total of 25 rooms with private bathrooms, fireplaces and most have private patios. Room rates (U.S. dollars) include the 17% tax and full breakfast. Rates vary from US $145 to US $156 (single or double) for the period of November 9-18 but are only guaranteed available until March 31, 2007. Visit www.casaluna.com for complete views of these spectacular properties. Contact Susana at (210) 200-8758 to make arrangements. Villa Mirasol is a 2-storey boutique hotel (4 stars). Each of the 10 rooms has a private bathroom and a sunlit patio or balcony. Room rates include the 17% tax and full breakfast. Rates vary from US $115 to US $135 for the period November 9-18 but are only guaranteed available until May 31, 2007. Visit www.villamirasolhotel.com or call Evangelina at 011-52 (415) 152-6685. Both businesses accept credit cards and can arrange transportation to and from the airports. Ask about sharing a vehicle to lower the cost per person. (Bus service is less convenient but also less expensive.) Exclusive cooking classes can be arranged during your stay as well as private folk art and area tours, etc. Leandro Delgado, a licenced guide, will be on hand to offer customized tours. Airfare The 3 neighbouring cities are Leon, Mexico City and Queretaro, Mexico. Queretaro, the closest city can be accessed from Houston on Continental for example. Dale and Betty have experienced traveling through all 3 cities. If you need assistance, call us. Conference Agenda Monday, November 12, 2007 10:00am-12:30pm - Exclusive walking tour of central San Miguel. 2:30-5:30pm - Presentations 5:30-7:00pm - Opening reception with refreshments. Tuesday, November 13, and Wednesday, November 14, 2007 10:00am-12:30pm - Optional house tours and private consultations. 2:30-5:30pm - Presentations Presentations
Graciela Loyola - Co-owner of San Miguel Management

Company, will visit with you about insurance in Mexico. Graciela is an agent for ING Comercial America, the largest insurance company in Latin America. She will help you understand what coverage you will need for your home,automobile, medical and life insurance and their related costs. Peggy Blocker - Co-owner of San Miguel Management Company, will talk to you about buying, managing and renting your new home in San Miguel. Peggy and Graciela will also talk about the cost of building a new home or remodeling the one you have just bought! Their company will also offer a Tour of Homes for Sale.
Mary Ann Ramirez Mary Anns law firm provides legal consulting and litigation in real estate, civil, business and corporate law. Youll learn all the information you need to buy Mexican real estate and how to protect yourself and feel secure with your investment. Mary Ann will also explain the importance of a Mexican will once a foreigner owns real estate.
Norm Hair and Carol Schmidt The coauthors of Fallingin Love with San Miguel: Retiring in Mexico on Social Security bring you their experiences with settling in San Miguel. Their frank and sincere comments will explain how you can do it also. There will be confirmation of other speakers next month. Theyll cover cross-border financial planning, a contrarians view of living in San Miguel and more. Fee Details The conference fee is C $169 (single) or C $199 (2 persons). Only 60 registrants will be accepted on a first-come, first-serve basis. Whats Included? all taxes, exclusive walking tour, opening day reception, practical presentations with question/answer sessions, consultation with reputable speakers, personalized house tours, sharing experiences with like-minded Canadians, and and our small group ambience. If you elect not to use our chosen accommodation, a supplemental fee of C $50/person is necessary to offset conference-related costs. We suggest you make your travel and accommodation arrangements first and then register for the conference. A conference registration form is available at www.canadianmoneysaver.ca/ ce_events.aspx or call 613-352-7448. JANUARY 2007
Dianne Kushner - Our gracious hostess offers a welcome

presentation to introduce you to San Miguel. Shell discuss establishing her hospitality business, investments and living
we sell the condo, how is the sale treated for tax purposes? C.E., e-mail In order to designate a property as a principal residence, you have to own the property either jointly with another person or otherwise. The CRA states in IT437R Ownership of Property (Principal Residence) that these words include tenancy-incommon. You will therefore be able to designate the property as your principal residence for the years that you lived in it. Assuming that you can designate it as your principal residence for all the years you owned it, any capital gain resulting from its disposition will therefore be exempt from tax. Peter Coles
Unless you accompany your inquiry with your MEMBERSHIP NUMBER (ID), and telephone number or e-mail address, your question will NOT be reviewed. Ask the Experts is a members-only service. (Not all answers are published here. Many more are found on our website.)
This month we highlight the contribution of Peter Coles to this advisory service. Peter has taken on more responsibility with H&R Block. Therefore, he is no longer able to accept further inquiries. We have been very appreciative of his support over the years. Lloyd Henry of H&R Block in Kitchener has volunteered to accept your inquiries. We welcome his participation.
on the sale of the land, special rules apply. The effect of these rules is to reduce the loss on the sale of the building by the amount of the gain on the land. So you may be restricted in the amount of the terminal loss that you can claim. Peter Coles
I sold the last of some rental properties. As the building will be demolished, can I claim a terminal loss? The sales agreement does not give separate figures for the land and building. M.V., e-mail
It appears that you sold the property to someone else who then demolished the building. If that is the case, the fact that the purchaser demolished it is not relevant to whether or not you can claim a terminal loss. If the building was disposed of for less than its undepreciated capital cost, a terminal loss will result. However, in the event that you incur a terminal loss on the sale of the building and a capital gain
Are dividends or interest earned by an RESP from sources in the United States exempt from the U.S. tax, including distributions from an income trust classed as a U.S. (foreign) investment? D.B., St. Catharines, ON
The exemption provided under Article XXI(2) only applies to dividends and interest paid to a plan operated exclusively to administer or provide pension, retirement or employee benefits. Unfortunately, it would therefore not apply to an RESP (since an RESP is operated to save for the beneficiarys education). Peter Coles
My mother and I are tenants-in-common on a condominium. It is my primary residence, and my mother lives elsewhere. If
I have two grandchildren who live in the U.S., one is a Canadian citizen and the other was born in the U.S. They both have their Canadian SIN numbers. I want to open joint investment accounts in their names and deposit their annual birthday and Christmas gifts (say about $3,000 to $4,000 a year) in these accounts. The money in the account will be used by the grandchildren in the future when they are older. What are the implications of this strategy? What do I have to carefully consider in order not to trigger any attribution rules on the investment income and gains? M.A., e-mail
The attribution rules require that any income earned by property transferred to a child or grand-
child be reported by you (the transferor of the property) until the year in which the child turns 18. These rules will apply even though your grandchildren are not resident in Canada. Although the attribution rules apply to income earned by property transferred to a minor child, they do not apply to capital gains. One possible way of avoiding the attribution rules would therefore be to give them property with strictly growth potential. This is commonly achieved through the medium of an in-trust account, which is offered by a number of different trust companies and other financial institutions. The transfer of your property to the account must be irrevocable, meaning that any subsequent withdrawal of funds can only be made if it is for the benefit of your grandchildren. Peter Coles
I have ADRs in my investment (non-RRSP) portfolio. Are my dividends reduced by country of origin and can I recover the taxes paid on my Canadian tax? J.M., e-mail
The rate of tax withheld from dividends paid through American Depositary Receipts will depend on the country where the company is located. Most of our tax treaties specify a maximum rate of withholding of 15% on dividends.You will be able to claim a foreign tax credit for the tax withheld on the dividends. This directly reduces your Canadian tax payable by the amount withheld. Peter Coles
JANUARY 2007 39
Canadian MoneySaver
Is there not a ceiling of $5,000 on the annual education amount that can be transferred to a parent? R.T., e-mail
If your son has tuition and education amounts that he cannot fully utilize himself, he may able to transfer part of the unused balance to you. The maximum he can transfer for federal tax purposes is: 1. The lesser of his tuition/ education amounts and $5,000; minus 2. The amount by which his taxable income exceeds the amounts he is claiming on Lines 300 to 318 of his Schedule 1. So, if your sons taxable income in 2006 was $8,840 and he was claiming only the basic personal amount of $8,839, the maximum he could transfer would be $4,999. A similar calculation governs the amount that can be transferred for provincial tax purposes except that in Ontario, the $5,000 figure is increased to $5,792. Any unused amounts that he cannot transfer to you can be carried forward and used by him to reduce his tax payable in future years. He will not have the option of transferring any of the amount carried forward in future years. Peter Coles
lated enough outside savings, plus my wife works), what kind of tax will I have to pay if I want to deregister my RRSP slowly, say $25,000 per year over 10 years, while having no personal income? Is this a bad idea or would I be better off getting a RRIF at age 50 with all funds from my RRSP? R.A., e-mail If your only income in 2006 was an RRSP withdrawal of $25,000 and you were claiming only the basic personal amount of $8,839, you would have federal tax payable of $2,465. As a resident of Alberta, you would also have provincial tax payable of $1,010. When you make the withdrawal, the issuer will have to withhold tax at source. The rate of tax is 10% on withdrawals less than $5,000, 20% on withdrawals between $5,000 and $15,000 and 30% on withdrawals in excess of $15,000. You would claim the amount withheld as a credit when you file your tax return. If you were to convert your RRSP to a RRIF, you would have to withdraw a minimum amount each year. The minimum amount would not be subject to withholding (although it would be included in income on your tax return). However, at your age, the minimum withdrawal would be very small. Other than that, I cannot see any advantages in converting your RRSP to a RRIF if you are intent on deregistering the funds before the age of 65 (at which time RRIF payments would qualify for the
pension income amount). Peter Coles
In my RRSP I own ING, trading on the NYSE. It appears the U.S. is taking a full 25% of the dividends earned. Is there anything I can do about this? G.B., e-mail
As you are apparently aware, the dividends should be exempt from U.S. withholding under Article XXI(2) of the CanadaUnited States tax treaty. This provision exempts dividends and interest paid to a plan operated exclusively to administer or provide pension, retirement or employee benefits. I suggest you send them Form W-8BEN, attached, quoting this article, to request that they stop withholding. Peter Coles
What are flow-through shares? S.H., e-mail

Flow-through shares essentially are investments that permit tax deductions (available to natural resource companies) to be claimed by investors. If you buy a flow-through share you can basically deduct the cost of the investment on your tax return. Within a year or two the investment will be converted to publicly traded securities but with no cost for tax purposes. The securities can then be sold and will be taxed as a capital gain. In essence, flow-through shares allow a full tax deduction when purchased but are only taxed at 50 cents on the dollar when sold. They effectively convert fully taxed income into capital gains. I think they are the best tax shelter around. Peter Coles, Tax Specialist, H&R Block Canada, Calgary, AB
If you purchased a timeshare 10 years ago for $10,000 and sold it this year for $6,000 can you declare the $4,000 as a capital loss in 2006? R.B., e-mail
Unfortunately you cannot claim capital losses on personal-use property. Unless it was an incomeproducing property, the answer is, therefore, no. If the property was an income-producing property, the portion of the loss attributable to the building would be a terminal loss (which is deductible against other income). The portion attributable to the land would be a capital loss, deductible against capital gains. Peter Coles
I currently hold an unregistered account with ETrade. I also have a registered account with another brokerage firm with approximately $250,000. I consider retiring in 2 years at the age of 50. Assuming I am earning zero income at retirement (I have accumu40 Canadian MoneySaver
My daughter-in-law graduated from university and is presently engaged in a one-year internship for which she receives zero compensation. She has incurred many expenses including moving, car purchase, rental accommodation, daily parking and auto expenses (because she has a territory to cover). All the while, she still has monthly student loan payments. Besides the student loan, is there anything she can claim now or in the future? T.S., E-mail
Unfortunately, your daughter-in-law would not be entitled to claim any of
JANUARY 2007
the expenses that you have listed because she will not have any taxable income. This year, however, if she lives in Ontario, she may be able to claim the Ontario Property and Sales Tax Credit for her rental accommodation. The student loan is a nonrefundable credit and reduces tax payable and she may claim that at anytime in the next 5 years against taxable income. In future years, once she completes her internship, since she has a territory to cover, and begins receiving an income, she may qualify for auto expenses, parking and Capital Cost Allowance on her automobile. In order to do this, her employer must complete and sign a T2200 (Declaration of Employment). Lloyd Henry, H & R Block Canada Inc., Kitchener, ON (519) 743-9882
I currently own a rental property. If I was to pull out the equity to use as a downpayment on a single unit home for me to live in, will I be able to deduct the interest on the full amount of the now increased loan against my rental income or can I only deduct the interest if I am purchasing more income-producing items? P.B., e-mail
Money borrowed to create income for investment purposes is always deductible as a carrying charge on Schedule 4. Money borrowed for RRSPs is never deductible. In your case the interest paid on the loan would be deductible as mortgage interest on the rental income statement of expenses. Lloyd Henry, H & R Block Canada Inc., Kitchener, ON (519) 743-9882
Consider Mexico
Come to learn a new way of life from a culture that goes back centuries before Columbus and Cortez. Find a way to enjoy life more fully and explore all the possibilities of your future. Follow the story of two women who overcame their fears and found a new life far better than they could have experienced anywhere in the U.S. on Social Security. Carol Schmidt and Norma Hair investigated many cities before discovering San Miguel de Allende, a breathtakingly beautiful art and cultural centre 165 miles northwest of Mexico City. Its been called one of the top ten cities in the world to retire to by Conde Nast Travel and Money Magazine. In vivid detail, they describe their first year experiencing all of the fiestas that fill the Mexican calendar. They share the problems they ran into, the adjustments they learned to make, what they pay for almost everything, and the new outlook on life. And theyre doing it on average Social Security in one of Mexicos most expensive cities. This book is their love story with San Miguel de Allende, and your window into a new way of looking forward to retirement. Fallingin Love with San Miguel by Carol Schmidt and Norma Hair, SalsaVerde Press, US$23.95, ISBN: 09787286-2-9. Order directly at www.salsaverdepress.com. Dales note: Betty and I have visited the authors home. Living frugally is their practice. However, they are living a comfortable lifestyle which many of us would envy and admire.
Canadian MoneySavers January 2007 Investment Conference
Investing for Your Future
Whats Included?
practical and advice-filled seminars, question-and-answer periods, private discussions with speakers, valuable handout materials, meeting like-minded investors, prizes and, free admission to Financial Forum.
ou are invited to join Dale Ennis and seven contributing editors at our one-day conference on Saturday, January 27, 2007. This information-packed conference will be held at the Metro Toronto Convention Centre during the four-day Financial Foruma financial trade show. Presenters will provide you with the latest proven investment strategies that you can apply immediately. You can also meet with them privately during the day.
Speakers and Presentations

Brian Quinlan, Chartered Accountant Tax Consequences of Investing When comparing investment opportunities the focus is after-tax returns. Brian will review the tax implications of various investment strategies and highlight how differences in tax treatment will be a major factor in making your investment decisions. Brian will also provide an update on the many tax changes for 2006 and advise you how you and your family can make the best use of them in 2007. JANUARY 2007 41
Location
Metro Toronto Convention Centre (Front Street West), two blocks west of the VIA station.
Schedule
8:30am-8:50am Registration 8:50am-4:15pm Presentations Canadian MoneySaver
Canadian MoneySavers January 2007 Investment Conference

John Stephenson, Portfolio Manager Secrets of the Skeptical Investor Are you sick of corporate scandals that send stock prices spiraling downward? Are you confused about the world of investments, yet know that you have to make the most of your investment dollar? Do you know if the companies that you invest in or broker recommendations can be trusted? Where do you turn for unvarnished advice to ensure that your financial future remains bright? In his talk, John will demonstrate the secrets that he has learned, the sectors that should outperform and what you need to know now to invest and prosper in the years to come. Norm Rothery, Financial Consultant The Mind, The Market and Defensive Investing If you had to choose between a guaranteed gain of $3000 or take a gamble where 80% of the time youd get $4000 and the other 20% of the time youd get nothing, would you take the sure thing or go for the gamble? Find out why most people opt for the sure thing when expecting gains but switch to the gamble when faced with losses. Then join Norm on a guided tour through the bizarre, and sometimes humorous, world of investment biases and mental shortcuts that can help or hurt your portfolio. Robert Floyd, Investment Counsellor Making Your Investments Grow when Interest Rates are Low With interest rates at low levels, what can an investor do to improve absolute returns? The answer lies in developing an effective strategy for managing your equity portfolio. This presentation covers some of the basics in managing a Canadian equity portfolio. Specific emphasis is placed on growth at a reasonable price style of investing. David Stanley, Retired Professor Beating the TSX It Works! Beating the TSX is simple, quick, and historically outperforms any Canadian largecap index or mutual fund. It will take only a few minutes a year to pick a portfolio of 10 stocks that has beaten the index by close to 25% over the past 19 years. The discipline it instills in individual investors allows you to avoid questionable advisors, mutual funds, technical analysis, options, high frictional costs and unnecessary taxes, while preserving your capital and building up a core portfolio of Canadian blue-chip stocks. For those investors with courage and patience Beating the TSX is a way to improve portfolio performance in up, down, and sideways markets. Derek Foster, Author Stop Working Now! Derek retired at 34 without an inheritance, winning a lottery, or anything else. His approach challenges the traditional dogma of saving millions of dollars for retirement and instead focuses on creating a stable income impervious to stock market corrections. Come and discover what Derek did (and what you can do) to obtain financial freedom. Benj Gallander, Newsletter Editor and Author Probability Probability is the very essence of the risk-reward ratio that defines successful investing. Many investors are all over the map with their methodologies to enhance wealth. Benj will simplify them by exploring seven rules that should lead to better financial returns at the end of the day.
How to Register
Pre-registration with payment is required to guarantee your attendance. You may register by: telephone - 1-613-352-7448 (9 - 4:30 ET) fax - 1-613-352-7700 online at http://www.canadianmoneysaver.ca/ ce_events.aspx mail, up until 2 weeks prior to the conference date - PO Box 370, Bath ON K0H 1G0
Non-members pay double the rate of members ($57/person) unless accompanied by a Canadian MoneySaver member.
Toronto Conference Registration Form

Yes, I or we will be attending the full-day investment conference on Saturday, January 27, 2007. My cheque/Money Order/Visa/MC is enclosed for: $28.50* ( 1 person) $57.00* (2 persons) * taxes included Visa/MC Number: ________-________-________-________ Visa/MC Expiry:___/____ Card Holders Name: _____________________________________________________ Name: ________________________________________________________________ Address:_______________________________________________________________ ______________________________________________________________________ City Province Postal Code Telephone: (_______)________-___________ Fax: (_______)________-___________ E-mail: ________________________________________________________________ Accompanying guests name(s): ______________________________________________________________________ Mail/Payable: Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 Tel: (613) 352-7448 Fax: (613) 352-7700 moneyinfo@canadianmoneysaver.ca
Member ServicesMember ServicesMember ServicesMember Services Member Services
Gifts
You may purchase gift memberships of Canadian MoneySaver for Canadians at the gift price of $21.15 (GST included). NB, NL & NS residents: $22.74 (HST included).
MEMBERSHIP NUMBER (ID) ______________________ YOUR NAME _________________________________________________ ADDRESS ___________________________________________________ CITY______________________________________________________________ PROVINCE_______________________P CODE_______________________ TELEPHONE # (___________)____________________________________ SEND A ________ YEAR GIFT MEMBERSHIP AND GIFT CARD TO: NAME ______________________________________________________ ADDRESS ___________________________________________________ CITY______________________________________________________________ PROVINCE_____________________P CODE_________________________
New Members Discount

Start Canadian MoneySaver magazine as checked:
2 years + 2 BONUS issues at $42.29 (GST included). THATS $41.45 OFF THE NEWSSTAND PRICE. NB, NL & NS residents: $45.49 (HST included). 1 year (9 issues) at $21.15 (GST included). THATS $16.53 OFF THE NEWSSTAND PRICE. NB, NL & NS residents: $22.74 (HST included).
NAME ______________________________________________________ ADDRESS ___________________________________________________
CITY________________________________________________________ PROVINCE_______________________P CODE_______________________
TELEPHONE # (____________)___________________________________ PREPAID ORDERS ONLY BY: CHEQUE/MO
VISA/MC # _____________________________________________ PREPAID ORDERS ONLY BY: CHEQUE/MO VISA/MC EXPIRY DATE ______________ (GST REGISTRATION # R105201230)
VISA/MC # ____________________________________________ VISA/MC EXPIRY DATE ______________
MONEYSAVER, BOX 370, BATH, ON K0H 1G0 PHONE: (613) 352-7448 (9-4:30 ET) FAX: (613) 352-7700
MONEYSAVER, BOX 370, BATH, ON K0H 1G0 PHONE: (613) 352-7448 (9-4:30 ET) FAX: (613) 352-7700 WEBSITE: www.canadianmoneysaver.ca
Start Canadian MoneySaver online service as checked: 2 years at $42.29 (GST included)/$45.49 (HST* included) 1 year at $21.15 (GST included)/$22.74 (HST* included) Add Canadian MoneySaver online service to print membership: Online upgrade @$1.76 (GST included) @$1.90 (HST* included) times the number of issues remaining in current print subscription to reach a common expiry date. Start a combination Canadian MoneySaver online and print membership as checked: 2 years at $74.09 (GST included)/$79.69 (HST* included) 1 year at $37.05 (GST included)/$39.84 (HST* included)
Online Service
Preferred Members Bonus
Renew at least 4 issues before your expiry date (second group of numbers on the line directly above your name), and before receiving the renewal envelope bound inside MoneySaver. This way you wont miss any issues. Extend as checked: 2 years + 3 BONUS issues @ $42.29 (GST included) NB, NL & NS residents: $45.49 (HST included). 1 year + 1 BONUS issue @ $21.15 (GST included) NB, NL & NS residents: $22.74 (HST included).
(* HST applies for NB, NL & NS residents.)
MEMBERSHIP NUMBER (ID) _____________________ NAME ______________________________________________________
MEMBERSHIP NUMBER (ID) _____________________ NAME ______________________________________________________ ADDRESS ___________________________________________________ CITY________________________________________________________ PROVINCE_______________________P CODE_______________________ E-MAIL _____________________________________________________ TELEPHONE #(___________)_____________________________________ PREPAID ORDERS ONLY BY: CHEQUE/MO
ADDRESS ____________________________________________________ CITY________________________________________________________ PROVINCE_______________________P CODE_______________________
TELEPHONE # (___________)____________________________________ PREPAID ORDERS ONLY BY: CHEQUE/MO
VISA/MC # _____________________________________________ VISA/MC EXPIRY DATE ______________

(GST REGISTRATION # R105201230)
VISA/MC # _____________________________________________ VISA/MC EXPIRY DATE ______________
Back Issues
two websites you visit regularly:
Please tell us
__________________________________________________ __________________________________________________
Back issues are available at $2.35 (includes tax) each until supplies are depleted. We currently have March/April, May, July/Aug, September , October and Nov/Dec 2006. Prepaid orders only.
If your mailing address is printed BELOW, your membership expires soon. Your expiry date is directly above your name. Use this coupon or the renewal envelope bound inside this issue. No other renewal notice is sent to you.
Time to Renew
YES, I WANT TO RENEW CANADIAN MONEYSAVER FOR:

2 years + 2 BONUS issues at $42.29 (GST included). THATS ONLY 5 CENTS A DAY. NB, NL & NS residents: $45.49 (HST included). 1 year (9 issues) at $21.15 (GST included). THATS JUST 38 CENTS A WEEK. NB, NL & NS residents: $22.74 (HST included). MEMBERSHIP NUMBER (ID)________________ NAME _____________________________________________________ ADDRESS ___________________________________________________ CITY ______________________________________________________ PROVINCE ______________________P. CODE _____________________ TELEPHONE # (_________)__________________________________ PREPAID ORDERS ONLY BY: CHEQUE/MO
VISA/MC # ___________________________________________ VISA/MC EXPIRY DATE ____________
MONEYSAVER, BOX 370, BATH, ON K0H 1G0 PHONE: (613) 352-7448 (9-4:30 ET) FAX: (613) 352-7700 WEBSITE: http://www.canadianmoneysaver.ca

Canadian Money Saver Jan 2007

Cargado por

Información del documento

Descripción original:

Derechos de autor

Formatos disponibles

Compartir este documento

Compartir o incrustar documentos

Opciones para compartir

¿Le pareció útil este documento?

¿Este contenido es inapropiado?

Copyright:

Formatos disponibles

Canadian Money Saver Jan 2007

Cargado por

Copyright:

Formatos disponibles

CANADIANMONEYSAVER.

Why Im Sticking With Income Trusts

Join MoneySaver in Toronto for an Investment Conference on January 27, 2007

JANUARY 2007 www.canadianmoneysaver.ca

Sharing with You

The Skeptical Investor

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

Figure 3 Falling Interest Rates A Boon For Stock Markets

Source: Scotia Capital Inc.

SCHEDULE OF KEY INTEREST RATE ANNOUNCEMENTS AND PUBLICATIONS FOR 2007

New Income Trust Tax Lands Me in Hot Water

Building A Better Portfolio

Emerging Market Investing Part 2

Vanguard Emerging Markets ETF

Excel India Fund

Shares MSCI Pacific ex-Japan Index Fund

Excel China Fund

Trailer Fees on ETFs!

Understanding the Benchmarks

Standard and Poors 500

Dow Jones Industrial Average

Index Fund Investing

The Stingy Investor

Five Stingy Stocks for 2007

Trusts After The Tax

iShares S&P 500 Value Index Fund (IVE)

Shoppers Drug Mart: Over the Border Rx

Earning double at TPX

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

Board Elections Who to Vote For and Why

Portfolio ConstructionFinancial Services

Beating The TSX

Why Im Sticking With Income Trusts

FIGURE 2. HOW THE RATE OF RETURNS DETERMINES THE LIFE OF A RRIF.

A Simple Theoretical Example

Dividend of the Stock Earnings of the Stock

Impact of High Turnover

Gentlemen Prefer Shares

0.0375 0.025 0.0125 0 0.0125 -0.0125 -0.025 -0.0375 -0.05

Ticker BAM.PR.T BSD.PR.A ENB.PR.D

Type of Company Operating Split Operating

Preferred Share Capital^ 68,423 47,538 18,665 123,000 53,166 72,363

Asset Coverage Ratio 2.38:1 2.19:1 3.1:1 2.4:1 2.3:1 2.6:1

2005-12-31 169,297 2005-12-31 113,629

Achieving Financial Comfort in Todays World

2001 RETURN RETURN RETURN EFFCY

45.8 3.8 70.2 -47 5 224 17 17 24

None None F or B None None F or B F or B F or B F or B F or B

1000 1000 100

Front F or B Front F or B None F or B F or B F or B F or B F or B

The Professional Advisor

A Full Suite of ETF Products

Personal File Management Part Two

RRIFs The Basics

The New Retirement

Learning about Life

Recent Proposals on Income Splitting

The Future of our Pension System

Family Wealth Planning

Planning For The Disabled

Get in the Game!

San Miguel Lifestyle Conference

LIMITED SPACE. ACT NOW.

NAME ____ ADDRESS _

CITY____________________________________________ PROVINCE_P CODE_____________

TELEPHONE # ()_______________________ PREPAID ORDERS ONLY BY: CHEQUE/MO

VISA/MC # ______________________________ VISA/MC EXPIRY DATE

MEMBERSHIP NUMBER (ID) _ NAME __________________________________

ADDRESS ________ CITY PROVINCE_P CODE_____________

TELEPHONE # (_)__________________________ PREPAID ORDERS ONLY BY: CHEQUE/MO

VISA/MC # _______________________________ VISA/MC EXPIRY DATE

VISA/MC # _______________________________ VISA/MC EXPIRY DATE

VISA/MC # _______________________________ VISA/MC EXPIRY DATE