Monthly Archives: October 2009

Terry Broaders

Beware of Fraud!  Protect Yourself !

“If they only worked as hard at legitimate, honest work just think how well they would do!” Yes, we must be talking about fraud artists, also known as hucksters, tricksters, swindlers, conmen, confidence men, charlatans, cheats, connivers, deceivers, scammers, fraudsters, sleeveens and flimflammers.  Their terms of “endearment” are surpassed only by their variety of techniques in separating you from your hard earned money. Though we cannot totally safeguard from being victims of fraud there are many steps that we can take to fortify ourselves.  Scam artists want to obtain as much personal information as possible in order to make false credit card purchases, create fake cheques, obtain fraudulent loans and through other nefarious methods steal your money. If you can keep your personal information away from them you can minimize your chances of becoming a victim. Some basic protective measures would include:

-Do not give out personal information over the telephone, by mail or through the Internet unless you initiated the contact or know with whom you are dealing.

-Do not disclose or share passwords and PINs. Do not write them down and carry them around with you. Make it difficult for them to be compromised by making a selection that is not easily guessed.  Shield your PIN when using automated teller machines.

-Carry only the identification and other personal information you need and keep other documents, such as your social insurance number, birth certificate and passport, in a safe place.

-Shred documents containing sensitive personal and financial data, such as account statements before throwing them out. This includes pre-addressed offers for credit cards. Basically, shred anything that contains your name and address and other information.

-Guard your mail and be alert for regular mail that you expect but mysteriously does not arrive. If you usually receive your credit card statement on the last week of the month there may be something amiss if it does not arrive this month.

-Regularly check account statements to ensure all transactions were actually authorized by you.

To conclude, be vigilant because the scammers certainly are.vigilant in seeking opportunities to steal your information and your money.

Odette Morin

TFSA loophole closed

If there is a way to scam the system, someone out there will find it.  I am just amazed at how fast and ingenious some people can be.  Unfortunately, taking advantage of the system usually ends up spoilling it for most of us honest people out there.

This time the “scam” is about taking advantage of Tax-Free Savings Accounts (TFSA).  The strategies in questions make deliberate use of the over-contribution and asset transfer transactions between TFSA’s and other accounts.

Canada’s Minister of Finance, Jim Flaherty, proposed amendments to the Income Tax Act to put an end to these practices.  Here is how it will now work:

Deliberate over-contributions

Contributions in excess of the annual $5000 contribution limit are subject to a tax of 1% per month on the highest amount of excess contributions for the month. The government says it has become aware that in certain situations that some TFSA holders are attempting to generate a rate of return on deliberate over-contributions over a short period of time sufficient to outweigh the cost of the 1% tax.

Under the proposed amendments, any income “reasonably attributable” to deliberate over-contributions will be made subject to a tax penalty on the income of 100%.

This means that if you earned, for example, $1,200 income or gain on an overcontribution then the tax penalty will be $1,200.  In other words, the government will tax back the entire profit that you made on an overcontribution.  Hikes!!  That is a hefty penalty ! It removes any incentive for “playing games” with the overcontribution limit !!

Asset transfer transactions

The government wants more scrutiny on asset transfer transactions – sometimes known as “swap transactions”. Asset transfer transaction usually are transfers of property (other than cash) for cash or other property between accounts for example, a RRSP and another registered account. When performed on a frequent basis with a view to exploiting small changes in asset value, the government says these transfers could potentially be used to shift value from, for example, an RRSP to a TFSA without paying tax, in the absence of any real intention to dispose of the asset.

The government’s proposed amendments would effectively prohibit asset transfer transactions between registered or non-registered accounts and TFSAs.  TFSA income amounts reasonably attributable to asset transfer transactions will also be taxable at 100%.

For full information on the government’s proposed changes can be read by clicking here

Odette Morin

Should you lock in your mortgage rate or not?

Interest rates are definitely trending up. Each of Canada’s 5 big banks announced a series of rate hikes last week. While there were some differences in the details of changes made by the banks to their mortgage rates, the announced hikes put all their five-year fixed closed rates at about 5.84 per cent. That seems high in relation to what we have seen in the past year however, the average rate if we exclude the early 80s, is about 5%.

How high can the rates go?  Should you lock in a rate now or wait or stay variable?  If you ask the bank, they will likely tell you to lock in because it is good for them but before you do, consider a few facts and research made on the subject.

One of Canada’s foremost authorities on personal finance. Dr. Moshe Milevsky, studied over fifty years of mortgage rate data (1950 to 2001). He concluded that anyone who locked in at a fixed interest rate paid more than they should have for their mortgage. During the above noted period, you would have been better off with a variable rate 88.6% of the time.

Does a variable rate mortgage still make sense? With interest rates expected to head north, the natural instinct is to lock in, but you may be better off over the longer term with a variable rate mortgage.  Dr. Milevsky feels there is no “one-size-fits-all solution” to choosing a fixed or variable rate.  He says it depends mainly one’s risk tolerance. Milevsky’s mortgage research is the best out there. He has shown time and again that regardless of what rates do in 1-2 year periods you are better off in a variable if you can handle the payment risk.

That is key, can you handle the payment risk?  In a financial planning perspective, you need to assess your cash flow situation and personal circumstances.  Locking in a rate may be better for some to provide peace of mind while for most, the variable option may be the less costly alternative.

Anthony Sabti

Mutual Fund Sales Recovering

Money that has been sitting on the sidelines is returning to long-term mutual funds.  Last month net sales of long-term mutual funds increased by 3.6% and since their low point in February have increased 29%.  Overall sales were still negative, mostly attributable to low-risk money market fund redemptions. 

The majority of long-term sales are in balanced fund and “fund of fund” purchases (a mutual fund which carries a portfolio of several mutual funds).  This indicates that risk tolerances are slowly returning, but are still not fully there.  Pure equity categories are still experiencing negative redemptions.  Year to date, the Canadian equity category has suffered $1.7 billion in net redemptions. 

It is unfortunate, yet very enlightening that client sentiment and sales were at the lowest point in February 2009, right before the onset of the rapid turnaround.  It is also disappointing that Canadian equity funds, which year to date are up 28%, are still suffering net redemptions.  This reinforces the principles of not following the crowd, being disciplined and staying invested during down periods. 

Anthony Sabti

Are equities worth the risk?

While equity markets have experience a strong climb since the March 2009 lows, investors are reevaluating the level of risk they want to carry in their portfolio.  Over the past 10 years the return on equities has been minimal, even negative in several asset classes.  Someone who had invested in long-term bonds ten years ago would have had a better return than someone who invested in equities.  These are the reasons why investors are questioning whether investing in equity funds over bond funds is truly worth the risk.

Historically speaking, the answer would be yes.  Looking at a historical chart of the S & P (American stock index) going back all the way to 1881, the 10yr return on equities over long-term bonds has been just around 6%.  In other words, stocks have outperformed bonds by an average of 6% since 1881.  Studies using data from 1950 onwards show an even higher outperformance of 7-8%. 

The same chart would show that besides this current period, long-term bonds have outperformed 10-yr return on equities at only two other points in the past 70 years.  Each point was followed by a strong upward spread between equity returns and bond returns. 

Although certain years may be marked by discouraging returns, in the long-run everything always reverts back to the mean. 

Odette Morin

Home Equity Line of Credit rates are going up above Prime

TD Canada Trust has just follow other financial institutions and issue letters advising their clients that their Home Equity Line of Credit interest rate will go up to Prime + 1% instead of Prime.  They also suggest to lock in to a mortgage at the special one year rate of 2.5%.  You should be very carefully reviewing your options before making a decision.

I spoke with two mortgage brokers and they explained that locking-in may not be a good idea for most people who currently have a line of credit because:

  • you would lose the flexibility of a line of credit where you can reduce the outstanding balance anytime or borrow back when needed
  • you must make mortgage payments, not just interest payments
  • you would have to pay a penalty to get discharged if you want to go back to a line of credit later
  • The locked-in rate seems attractive but because it is calculated semi-annually and not daily, the actual difference between the two works out to be only about .2 or .3 basis point. Not worth the lost of flexibility.

To summarize, it may not be better for you to lock in in a mortgage product even if the rate seems attractive. Just give a call or drop me a line anytime.  I can refer a mortgage specialist who will help you determine what is best for you.