Monthly Archives: May 2011

Anthony Sabti

Christy Clark Government Pledges 2% HST Reduction.

On Wednesday, the BC premier announced a plan to reduce the HST from 12% to 10% in a two-step process.  The HST rate would fall from 12% to 11% on July 1, 2012. The rate would drop to 10% two years later.

Of course, this proposal is contingent on the outcome of two events.  First, the HST has to pass this summer’s mail-in referendum, where BC residents decide if they want to keep the HST under the proposed the changes.  Second, voters also have to re-elect the provincial Liberals to a fourth term in office.

To bridge the HST gap until the first rate cut, the government is offering a $175 cheque for every child under the age of 18, to be paid out later this year. As well, seniors with an income under $40,000 would get the one-time payout of $175.

The B.C. premier also plans to increase corporate taxes to help offset the HST cut.  By Jan. 1, 2012, the province’s corporate tax rate would rise from 10 per cent to 12 per cent.  This would represent a reversal for the Liberals, who have steadily cut corporate taxes in the name of competition and job creation since taking office in 2001. 

 Markets & Rates (as of May 27, 2011)

Markets   This Week Year to Date
TSX 13798 1.07% 2.6%
DOW 12442 -0.56 7.5%
S&P 500 1331 -0.15% 5.8%
CAN$/US$ 1.023 -0.36%  
GIC Rates 1 year  5 year  
Group High 2.10% 3.25%  
Group Average 1.45% 2.79%  
Mortgage Rates 1 year  5 year  
Group High 2.70% 3.71%  
Group Average 3.28% 4.59%  
Can. Prime Rate 3.00%    
US. Prime Rate 3.25%    

Source: Bloomberg Canada; Bank of Canada; Mortgage Alliance; Fiscal Agents; Statistics Canada.

Odette Morin

Should you take CPP from age 60 or 65? How do the new rules affect you?

Between them, the Canada and Quebec Pension plans cover every Canadian who does paid work, whether as an employee or self-employed. Employees and their employers split the cost of contributions.

The self-employed pay both sides themselves. Contributions are not based on full income, but rather on “year’s maximum pensionable earnings,” a measure of the average wage. CPP covers people everywhere but Quebec. Both plans are plans are very similar, and are integrated so those who move between provinces do not lose benefits.

Please note that CPP introduced new rules effective January 1, 2011. While QPP has announced its own revisions, I will only cover CPP in this infokit. Here is some detailed information on the new rules.

CPP retirement benefits depend on your record of contributions and when you start taking benefits. In 2011, the maximum monthly benefit payable at 65 for a new recipient is $960. CPP is still payable, even if you retire outside Canada. If the amount doesn’t seem like much, consider this. CPP benefits are fully indexed for inflation, with adjustments made quarterly. If your RRSP earns 6% and inflation averages 3% you would need $176,530 to fund the same income stream for 20 years. So, self-employed persons who think of opting-out of CPP by paying themselves dividends rather that pensionable self-employment earnings, should think twice before doing so.

Effective January 1st, 2011, Finance Canada announced changes to how Canada Pension Plan will work. The goal is to keep older workers in the workforce longer in order to lessen the future labour shortage when the baby boomers retire. In brief, the changes will take effect over a period of time from 2011 to 2016, so will affect anyone planning to retire from 2011.

a) early retirement (before age 65) will result in a reduction in CPP benefits by 7.2% per year, which is up from the traditional 6%. This means that if you begin to take your pension at age 60, rather than waiting to 65, your payments will be cut by 36%, not 30%. There is a transition period. The following table outlines the increase in the monthly actuarial factor for each year.

Year monthly reduction annual reduction
2012 0.52 6.24%
2013 0.54 6.48%
2014 0.56 6.72%
2015 0.58 6.96%
2016 0.60 7.20%

b) on the flip side of this, for late retirement (after age 65 but before age 71), CPP benefits will be increased, not by 7.2% but by 8.4%, which is up from the traditional 6%.

This means that if you wait until age 70 to take your CPP, the benefit payments will be 42% higher, compared to the previous 30% higher. The following table outlines the increase in the monthly actuarial factor for each year during the transition phase.

Year monthly increase Annual increase
2011 0.57 6.84%
2012 0.64 7.68%
2013 0.70 8.40%

 c) if you want to begin to collect CPP while you are still working. then instead of having to stay out of work for 2 months as before the changes, you can begin to collect CPP at age 60 even if you continue to work – AND after age 65 if you are collecting CPP but want to continue to work, or return to work, you have the choice to contribute to CPP again through your work in order to increase your benefits.

d) the calculation for CPP will change as well – before the changes, the lowest 7 years of earnings were deleted from the calculation – under the new rules, the lowest 8 years are omitted so that the benefits are not weighed down by low earning years. These changes do not affect the Quebec Pension Plan. Here is more information about the integration of the new rules.

Here’s a rule-of-thumb method used by Service Canada staff in advising people (assuming the 2016 rates):

1. Determine how much you would get if you were now 65. That figure is available from your local Health and Welfare Canada income security office. Let’s say it’s $960 a month.

2. Reduce that by 0.60% for each month you start early. Starting at 60 cuts it by 36% -or $345 per month to $615.

3. Multiply that by the number of months until age 65: $615 x 60 = $36,900.

4. Divide that by $345, the reduction from step 2. That’s 106.96. 5. Divide that by 12. The answer –8.9 years- is your approximate break-even point. So waiting until 65 can make sense if you expect to live past 73.90.

Should you take the CPP early or wait? This highly depends of your own personal circumstances. Here are a few pointers:

• Consider waiting if you don’t need the money to live on, are in good health and find yourself in a high tax bracket. The CPP benefit and any earnings on it will be taxed.

• Consider waiting if the benefit could also increase your exposure to the OAS clawback.

• Waiting means your benefit will be higher when you do start collecting CPP. You might even find that the extra 0.7% per month plus indexing beats the after-tax income you would make if you took the money early and banked it.

• However, if you need income and would otherwise have to draw from RRSPs, starting CPP early would likely be best for you because it would mean that your RRSP funds can stay tax-sheltered longer. This depends on your marginal tax rate and the rate of return you earn on your RRSP.

There is also a death benefit from CPP. That is a lump sum of $2,500 plus a monthly income based on the survivor’s age. You can find more on this on the Service Canada website at:

You must apply for government benefits: they do not begin automatically. You should complete the application form a couple of months before you become eligible. Here is the form you will need.

Remember that we are there to help if you need us with figuring out your CPP options!

Anthony Sabti

Home Bias Still Strong Among Canadian Investors


A recent global survey by investment firm Brandes found that Canadians with more than $250,000 in investable assets hold, on average, only 15% of their equity portfolio outside North America.

While the remaining 85% includes U.S. assets as well as Canadian, that still represents a significant overweight to North American markets. On average, Canadian markets account for 66% of investors’ total portfolios and 64% of their equity portfolios. 

“When two thirds of their equities are here, along with their real estate and jobs, that’s putting a lot of eggs in one Canadian basket,” says Oliver Murray, president and CEO of Brandes’ Canadian unit.

Canada accounts for only 4% of the world capitalization.

Interestingly, a lot of people in the survey believe the old foreign ownership rules still apply. The 30% foreign content rule was removed six years ago, but only 5% knew there is no limit on foreign content, while 10% believed their RRSP had to be 100% Canadian.

Canada has certainly been a great place to be the past decade because of the commodity and resources theme and demand by emerging markets. The TSX has outperformed the S&P 500 for the past 7 years.  The strong loonie and weakening U.S. dollar has also benefited domestic investors. However, the trend may be shifting.  Year to date, the TSX is up 1.4%, whereas the S&P 500 is up 6.8%, and the DOW is up 8.9%.

Odette Morin

When you dig, the raw data is not so bad:

Just back from a glorious week off at our cottage.  Our backs are wrecked from extreme weed pulling and general gardening but our minds are fresh and rejuvenated. Here is a quick up-to-date market review, interestingly enough, when you dig and look beneath the surface, the raw data is really not so bad:

  • Canada’s economy stepped up a gear in April, pumping out a surprisingly strong 58,300 jobs—almost all of them in the province of Ontario and a big portion of them part-time. Year over year gain increassed to 283k.
  • Economic growth is still surprisingly strong here in Canada and inflation comes with the territory. Inflation numbers will come out Friday , another hike expected.  Food and energy are mostly responsible.  We expect the trend to continue but a more moderate pace.
  • Consumer confidence amongst US consumers rose in May.  The U.S. Census Bureau announced a tenth consecutive monthly advance in retail sales for April. The 0.5% gain left the annual growth rate at a healthy 7.8%.
  • Better than expected gains in the German and French economies powered eurozone growth ahead of economists’ forecasts.
  • Concerns of weakening demand from China and other fast growing emerging markets in Asia are partly behind the devastating rout in commodity prices in past few weeks. Even as oil prices have pulled back from their recent highs, we expect them to return to or surpass the recent highs by next year over the mid-term.
  • With very accommodative government policies in the U.S. and Europe, growing consumption from the emerging countries and compelling stock valuations, equities remain attractive investments. However, market turbulence will remain high as the world’s economies continue to work their way out of the recent economic slowdown.

Remember to stay invested through a widely diversified portfolio in relation to your needs and you will as always, weather through this just fine.

For those who have not seen our cottage yet, I thought I would attach a picture before the weeds start coming up again!

Odette Morin

Why have my investment gone down in value these past few weeks?

You may have noticed that your account value may have suffered some losses in the past few weeks and wonder why, especially since we appear to be in a recovery. Here is why and what to do about it.

Markets around the world have dropped a few percentage points in most countries in the past few weeks caused by several world events starting with geopolitical turmoil spreading from Egypt to Libya to the Middle East followed by the devastating Earthquake & Tsunami in Japan.  Oil prices soared and that ugly word “Inflation” is on everyones minds.  The Asian / Europe monetary policy tightening, and the uncertain debt environment ( the end of  the controversial monetary policy, quantitative easing in June) are also amongst the negative market factors . 

When such events happen, inevitably, volatility returns.  Markets always react to uncertainties. The set back we are experiencing now follows a very surprisingly quick and strong recovery after the “Great Recession” triggered by the financial crisis.  It is normal and healthy to have a bit of a cool off after this amazing run up.   In fact,  several markets (DOW, TSX) have reached post-recession highs in the past few weeks and the year over year figures are still very good (17% for TSX, 13% for S&P as of March 31).   It is always upsetting to see our portfolio go down in value and even if you own very good, solid and poised for growth companies, fluctuations are inevitable.

The message we keep hearing from analysts is clear and consistent.  The Canadian and U.S. economies continue to improve and many indicators point to further expansion. Strong balance sheets and cash flows have corporations increasing dividends and indicating that higher payouts are highly probable. “The market is currently trading at a price-earnings multiple of just under 20 times based on trailing earnings and 16 times based on consensus 2011 estimates. We expect the multiple to shrink by year end as the Bank of Canada increases rates. However, even if the multiple shrinks, investors could still expect returns from Canadian equities for the remainder of the year. ” – Manulife Q1 Market Commentary

Going forward though, we feel that the cycle is maturing and only four of ten Canadian equity market sectors can be described as being attractively valued, with valuations at a discount to the historic median and profitability higher than historic norms. Five sectors – comprising 82% of the index – fall within the reasonably valued category. 

The biggest threat is indeed inflation.  What can the investor do?  Different inflation projections lead to different strategies. The strategy here is to buy the asset class likely to rise:
• Commodities and commodity equities
• Gold and gold equities
• Residential real estate
• Selected equities

But a strategy to buy  “protection” against CPI rises includes categories such as:
• Real Return Bonds
• Energy and energy equities
• Food and agricultural equities (Food and energy are often the driving force in headline CPI)
• Residential real estate (it often matches CPI cycles)

To summarize, the news is not all bad.  The fundamentals improve and yes we can protect ourselves from inflation and even profit from it. Management skills are of utmost importance in these types of markets. Picking the most skilled managers in these changing markets is essential.  We are confident in the  fund managers we select for our model portfolios and remain positive in the mid to long term outlook as we expect the recovery to continue, although at a slower pace than what we experienced in the past 2 years.

 In any event, stay tuned and visit our blog often.  Never hesitate to contact us for a review should you have any questions or concerns.

Odette Morin

The Conservatives have won a majority Government. Budget recap.

Now that the Conservatives have won a majority government, we are likely to see the latest Budget pass into law.  Here is a quick recap of the Federal Budget highlights announced last March:

  • Guaranteed Income Supplement for low income seniors will be topped up to a maximum of $600 per year for single seniors and up to $840 per year for couples. This is welcome news for the country’s poorest seniors.
  • Enhancing Student Assistance Programs Budget 2011 will expand eligibility for Canada student loans and grants for both full- and part-time post-secondary students. For instance, part-time students with high family incomes will now be eligible for a Canada Student Loan.
  • There’s also a minor change to Registered Education Savings Plans. The budget proposes to allow transfers between individual RESPs for siblings, without triggering tax penalties or repayments of Canada Education Savings Grants.
  • Children’s Art Tax Credit Ottawa is introducing a new credit for children of up to $500 of eligible expenses for programs associated with artistic, cultural recreational and developmental activities. This is in addition to the fitness credit.
  • Support for Small Business The Hiring Credit for Small Business will provide a one year EI break for about 525,000 small businesses. “The measure will reduce payroll costs for new jobs and encourage hiring,” Flaherty said in his budget speech.
  • Unfortunately, we did not get what we were hoping for. There is “no extra contribution room, no changes in age limits, no cuts to personal or corporate tax rates,” Heather O’Hagan, tax partner with KPMG.
  • No change to the RRIF minimums either. Rather than lower that rate in accordance to extended longevity and smaller annual investment returns, Budget 2011 targets business owners by introducing a similar taxable withdrawal requirement for Individual Pension Plans (IPPs). These are Defined Benefit pensions individuals, couples or small groups. IPP holders will first have to tap existing RRSPs and RRSP contribution room before funding an IPP with past service contributions Ottawa is introducing RRSP “anti-avoidance” rules that parallel earlier crackdowns on the Tax Free Savings Accounts introduced in 2009.
  • The budget hopes to save half a billion dollars over the next five years in a crackdown on perceived abuses of both RRSP and RRIFs “swaps”, “draw down”and other shady schemes which promotes withdrawing from RRSP tax free.
  • Another crackdown is aimed at affluent families who use complex accounting structures to move money from corporations to their children largely free of tax. The budget says the tax on split income – also known as the “kiddie tax” — will be “extended to schemes involving capital gains of a minor child on the sale of shares a corporation” to someone who is not dealing at arm’s length with the child.
  • Charitable giving tax incentives are also targeted. In addition to a package of “integrity measures for charities” that aims to combat fraud and abuse of charitable donation tax incentives, Ottawa is halting a double-dipping practice involving donations of flow-through shares for taxpayers who already enjoy generous resource exploration tax benefits.
  • Extending a retrofit program that encourages homeowners to make their homes more energy efficient.
  • Encouraging health care workers to locate in remote communities by forgiving up to $40,000 in student loans for doctors and up to $20,000 in student loans for nurses.
  • A new Family Care Giver tax credit of up to $2,000 will be introduced to lift some of the burden on people caring for family members at home.