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Monthly Archives: January 2017

Terry Broaders

Weekly Update January 27 2017

“Whoever Is Winning At The Moment Will Always Seem Invincible” -George Orwell

Lower Oil Price Hurts TSX

The main TSX index closed lower Friday as energy and financials led losses for half of the main sectors while IT and materials were the best performers. Oil prices slipped almost 1.5 per cent in the session but closed out the week higher as concern grew over rising US production which threatens to dampen the impact of the output caps agreed by OPEC and others.

The S&P/TSX composite index shed 39.71 points to 15,575.81, with the energy sector registering the biggest losses for the index.The March crude contract slipped 61 cents to US$53.17 a barrel.

In New York, the Dow Jones industrial average lost 7.13 points to 20,093.78, the S&P 500 dropped a meagre 1.99 points to 2,294.69, and the Nasdaq composite rose 5.60 points to 5,660.78.
The Canadian dollar fell 0.23 of a U.S. cent to 76.12 cents US.

European indexes closed generally lower although London’s FTSE gained on optimism from the British prime minister’s meeting with President Trump. Asian indexes closed mostly higher although trade was thin with some markets, including China, closed for public holidays.

 

CRA Business Inquiries Phone Line Gets a “C-“

Third time isn’t a charm for the CRA’s business inquiries phone line. As part of its red tape awareness week, the Canadian Federation of Independent Business (CFIB) has conducted its third secret shopper evaluation of CRA’s call centre, giving it a grade of C-minus. Here’s the breakdown of the grade:

Accountability (A+). CFIB saw a laudable increase in agents providing their name and agent identification number.

Accuracy of information (D-). Only 69% of inquiries resulted in complete and accurate answers. This is a decrease from the 2012 survey, where 76% all responses were complete. A third of callers are still receiving incorrect or insufficient information.

Connecting to an agent (F). The lacklustre evaluation was mostly due to the number of calls that didn’t reach a CRA agent — nearly 30%. On many occasions, the callers simply couldn’t get past the busy signals. The number of calls that were unsuccessful at reaching an agent is up 50% since 2012.

Wait time (B+). Once in the queue, callers waited only two minutes on average, which is the goal set out by the CRA service standard.

Agent professionalism (C-). While the majority of agents tried their best to answer questions, some put little effort into answering clearly and correctly. Some agents simply read the answer off the website, while others directed the caller to the webpage without providing a verbal answer.

“The CRA helpline needs to find ways to offer better service to business owners,” says CFIB vice-president of national affairs, Monique Moreau, in a release. “We do applaud the government’s investments in the call centre from budget 2016 but encourage them to continue making good customer service a priority.”

 

Sources: Bloomberg; Investment Executive; advisor.ca;  CFIB

Odette Morin

Contact us early to make your RRSP contribution!

RRSP is upon us and soon you will get an email from Anthony or Frank asking you whether you plan to make an RRSP contribution this year.  You should make arrangements early even if you don’t want to make the contribution right away simply because we will have more time to figure out what is best for you.

Here is what we will ask you to optimize your planning and maximize your tax saving now and at retirement.

  1. How much of a contribution do you want to make?  Of course, you should at least make enough of a contribution to meet your annual saving goal as calculated at your last annual review meeting or ask us and we will figure this out with you.
  2. Do you have the RRSP deduction room? If we do your taxes, we will know what your 2016 RRSP deduction limit is.  If not, you can sign a CRA authorization form to allow us to view your tax information online.
  3. If you have a spouse, we will need to know your spouse’s income as well as yours. We need this information to assess and determine if it is best to direct the contribution to a regular RRSP or a Spousal RRSP.
  4. We will also look at both your retirement savings total and try to equalize the accounts to be able to split income at retirement and save taxes.
  5. We will also ask whether your 2017 income is likely to be much greater than 2016’s income.  If this is the case, you can still make the contribution now but may be best to carry it forward to 2017 tax return.
  6. We will also make sure that you make your RRSP Homebuyers plan repayment if you have a repayment to make.
  7. Finally, if you plan to use some of your RRSP to buy a home, we will put these funds in a “short term” RRSP saving fund to avoid any fees and market losses.

Contact us early to get the most of your RRSP planning! Contact email hidden; JavaScript is required or email hidden; JavaScript is required

 

Anthony Sabti

2016 Market Review & Key Themes for 2017

2016 was the year of surprises.  There were a number of unexpected political outcomes throughout the year, namely the “Brexit” vote, Donald Trump winning the U.S. presidential election and OPEC members reaching a deal to reduce oil production.

But perhaps the biggest surprise was stock markets themselves.  After the worst 10-day start in history and a January that saw 93% of investors lose money, both Canadian and U.S. markets finished the year with healthy double digit returns.  The Canadian index, represented by the TSX finished up 17.62%. The Dow Jones Industrial Index (DOW) in the U.S. set new highs and almost reached the 20,000 point mark.  It finished the year up 13.42%.  The Global Index, represented by the MSCI world, finished the year up 5.41%

What happened in 2016 serves as a reminder to investors to ignore the “noise”, take a long-term approach, and remember the importance of investing in a high quality and diversified portfolio.

Key Themes for 2017

We expect two key themes to emerge in 2017:  Improved U.S. Growth and Bond/Equity Divergence.

Economic indicators in the U.S. strengthened in the second half of 2016, confirmed by a Gross Domestic Product (GDP) number of 3.5% and a projected 2.0% pace in the 4th quarter, which comfortably exceeds the ceiling for U.S. economic growth.  The Republican administration’s planned policies are also expected to accelerate economic growth in the U.S.  Overall there is renewed faith in the longevity of the U.S. recovery.

The second key theme for 2017 is likely to be a continued divergence between equity and bond returns. For thirty years equity and bond returns have been positively correlated in that falling interest rates have benefitted equities and bonds. That has changed since the U.S. election on November 8th. Since the election, U.S. equities have rallied sharply in anticipation of stronger economic growth and its causal linkage to stronger corporate earnings while U.S. bond returns have been very soft. Bond returns have been weak because investors fear that fiscal stimulus will cause inflation to move upward.

Equity Outlook

As mentioned above, the Republican administration’s planned fiscal stimulus is expected to accelerate economic growth in the U.S.  Stronger economic growth and higher inflation should be beneficial for revenue growth, and proposed corporate tax cuts would provide a meaningful boost to corporate earnings. Because of all these possible measures, we continue to be biased towards U.S. equities.

Several Canadian companies should benefit from the strengthening of the U.S. economy in 2017. However, with weak commodity prices and Canadian economic growth and inflation expected to remain modest, Canadian equities are likely to underperform their U.S. counterparts in 2017.

Equities in some European countries are attractively valued but because of persistently low growth, inflation, high unemployment, and growing uncertainty about the future of the euro, we recommend an underweight position in international and emerging market equities.

Fixed-Income Outlook

During the first part of 2016, bond prices increased due to weak economic growth and inflation. However, as central banks’ monetary policies appeared to have peaked and it seemed that governments would have to begin implementing their own fiscal stimulus, bond prices decreased in the second half of the year.

While domestic and global government bonds can offer stability and diversification benefits, overall returns are expected to be low. Thus, most bond managers are underweight government bonds.  They may simply decide to hold cash instead and maintain a neutral weighting in investment grade bonds based on the slightly higher yields they offer over governments.

The consensus is that the Bank of Canada will hold its key interest rate steady for some time to come and that the U.S. Federal Reserve Board will modestly increase the federal funds rate over 2017.  This will likely keep short-term rates low, but U.S. fiscal stimulus may push longer yields modestly higher.

This will help keep the Canadian dollar remain low for an extended period.  The U.S. dollar is expected to drive higher due to higher growth and inflation in the U.S.

Conclusion

Although 2016’s surprises created volatility and uncertainty in the capital markets, they also created opportunities for experienced investors, and will continue to do so in the coming year.

We continue to recommend a diversified portfolio that is tailored to your individual investment objectives to take advantage of opportunities as they arise, while protecting your investments from further volatility.

On behalf of the entire You First team, we would like to wish you and your family all the best for the year ahead, and to remind you that my team and I are just an e-mail or phone call away should you wish to discuss your investment portfolio in greater detail.

 

Frank Mueller

Understanding Your Account’s Performance

Price Per Unit, Net Invested, Book Value, Market Value, Net Asset Value, and Adjusted Cost Base are some of the terms you may come across on your statement. People commonly struggle at times to understand the different “values” that are listed on their portfolio statements. This terminology confusion makes it very difficult to look at your statement and determine how the portfolio is really doing.

Understanding how your portfolio, and the funds within the portfolio, is doing will allow you to make better investment decisions going forward. Let’s investigate this a bit further.

Terminology

Price Per Unit, or Net Asset Value Per Unit (NAV): This will be listed for individual funds in your portfolio. The Price Per Unit refers to the dollar value of 1 individual unit of the fund in question.

Market Value: Market Value of a fund is simply its current value as of the statement date. If your statement was printed today with today’s date, it would reflect yesterday’s market close unit price. The market value of Jim’s fund of 1,000 units of Fund XYZ with a unit price today of $10.00 NAV = $10,000.

Net Invested: This figure will appear for each fund you hold and for each account. Net Invested is simply the initial investment, plus all contributions, minus all withdrawals. For example: Jim initially invested $10,000 in Fund XYZ, subsequently made $1,000 in contributions, and then withdrew $500. Jim’s Net Invested is therefore his Initial Investment ($10,000) + Subsequent Contribution ($1,000) – Withdrawals ($500) = Net Invested of $10,500.

Adjusted Cost Base (ACB) aka Book Value: Book Value (or ACB) is the initial investment, plus subsequent contributions, plus any reinvested distributions, minus any withdrawals. Using the above example, let’s say that Jim also received $100 in interests/dividends distributions, which he opted to reinvest into XYZ. This Book Value (ACB) is thus his Initial Investment ($10,000) + Subsequent Contribution ($1,000) + Reinvested Distribution ($100) – Withdrawal ($500) = Book Value of $10,600.  This is important for tax purposes in a non-registered account.  When you sell these units, you will pay tax on the Market value minus the Book value.

Performance

One common misconception when looking at a statement is to gauge performance by simply taking the Market Value and subtracting Book Value (ACB). This DOES NOT equal performance, and we know this because we’ve already demonstrated above how Book Value differs from Net Invested. How you opt to receive distributions affects your Market Value and Book Cost (or ACB).

As you can see, when calculating the performance on a mutual fund investment it’s important to consider your initial investment, as well as your subsequent contributions and withdrawals or what we call your Net Invested. Let us know if you have questions about your portfolio’s return, as we can explain how your investments are performing, and help you to make the right decisions going forward.

Terry Broaders

An RRSP Urban Myth

Did you hear that Canada’s new plastic polymer bills contain a special agent that makes them smell like maple syrup?  That’s a great story but that’s all it is; just a story.  It’s another urban myth just like many myths surrounding RRSPs.

One myth we hear often is that RRSPs are a terrible idea because “you lose the lucrative dividend tax credit and the 50% capital gains reduction; that it is always better to invest outside of an RRSP.”   It’s been proven time and time again that investing within an RRSP is more advantageous than investing in a non-registered account.

Let’s consider a simple example.

Assume an individual has saved $10,000 and she’s wondering whether she should invest it inside her RRSP or in a non-registered account. We’ll further assume her marginal tax rate is 40% and that she buys an investment that triples in value over a 20-year period.

Would she be better off investing inside or outside her RRSP?

To answer that question, we need to consider the tax refund.  Assuming she has income tax deducted from her paycheque, a $10,000 contribution to her RRSP will generate a $4,000 tax refund because she’s in a 40% tax bracket.  So, that $10,000 RRSP contribution wouldn’t actually cost her $10,000; it would cost her just $6,000 ($10,000 minus the $4,000 refund).  Stated another way, at a 40% marginal tax rate, $10,000 inside an RRSP (which contains pre-tax dollars) is equivalent to $6,000 in a nonregistered account (which contains after-tax dollars).  This is because if you are paid $10,000 and you are in a 40% marginal tax rate the government would take $4,000 leaving you with $6,000.

Now, let’s return to the example, using these numbers as our starting points. First, investing inside the RRSP: The $10,000 would triple to $30,000 after 20 years; that’s an average annual return of 5.65%. If she then sells the investment and withdraws the money, she’ll pay $12,000 of income tax (40 per cent of $30,000) and be left with a net $18,000.

Now, investing outside the RRSP: The $6,000 would grow to $18,000 after 20 years. If she then sells the investment, she’ll pay capital gains tax of 20 per cent (half of 40 per cent) on the $12,000 difference between her sale and purchase prices. After deducting $2,400 in tax, she’ll be left with just $15,600.

Verdict: The RRSP produces a superior return. Notice that the difference between the RRSP and non-registered totals ($18,000 versus $15,600) is equal to the capital gains tax ($2,400) that applies in the non-registered scenario. Far from “losing the 50% capital gains reduction,” the RRSP avoids capital gains tax entirely.

The RRSP will always come out ahead if you assume a constant marginal tax rate and if you start with amounts that are equivalent on an after-tax basis. That’s because capital gains, dividends and interest are not taxed in an RRSP, but they are taxed in a non-registered account.  With an RRSP, the only tax is on withdrawals. People love to complain about the tax on withdrawals because it looks so large, but it’s really just the original tax they deferred plus the growth of that tax over time. As the example above showed, even after paying tax on withdrawals, the RRSP investor still wins. If an investor’s marginal tax rate is lower in retirement as it nearly always is, the benefit of RRSPs is even stronger.

What if someone’s marginal tax rate is higher in retirement?  This would be extremely unusual as most people simply make less money when retired versus while working, But in this case wouldn’t that make RRSPs a bad choice? Not necessarily says Jamie Golombek, managing director of tax and estate planning with CIBC Wealth Advisory Services. In a research paper available at goo.gl/uaMJr9 he examined various scenarios.  His analysis showed that, even assuming a fairly drastic 10%-percentage-point increase in the marginal effective tax rate, RRSPs would still enjoy an advantage over non-registered accounts given a long enough investing horizon. That’s because the benefits of tax-free compounding would eventually outweigh the impact of a higher METR on withdrawals.

So given the choice between an RRSP and a non-registered investment the RRSP is the superior choice.

Odette Morin

How bright is the future really?

I walked by a bank the other day. In the window was a cheery poster of a boomer on the golf course. The headline asked if you were ready for retirement. A positive image, but so misleading.

The reality is that we’re living longer. That means your savings will have to carry you for 20, 30, even 40 years. For many, not having enough money to play golf will be the least of our concerns.

The outlook isn’t sunny, but it can be. Before I give you the good news though, we need to face facts. From a report, released last year by the Broadbent Institute:

  • Half of Canadian couples between the ages of 55 and 64 have no employer pension.
  • Of those, less than 20% of middle-income families have enough saved to adequately supplement government benefits and pension plans.
  • A large percentage of working Canadians are heading into retirement without adequate savings to keep them out of poverty.
  • Income trends suggest the percentage of Canadian seniors living in poverty will increase in the coming years, especially for single women who already face a higher than average rate.
  • The poverty rate for seniors will climb at the same time as a sharply rising number of Canadians hit retirement age in the next two decades; more than 20 per cent of the population will be older than 65 within 10 years.

What’s more, people over 40 years old are using credit to pay for exotic vacations, bigger homes and other non-essentials. Imagine being in your 40’s and working on your debt instead of your retirement saving?

The good news is that you have the power to change how your future unfolds and you don’t have to do it alone. See your financial advisor! Book regular planning meetings and take control over your future.

Did you know that 57% of Canadians don’t have a financial advisor? People take their cars to specialists, but they don’t think to bring their financial future to experts.  Mon Dieu!

Okay, okay, I’ll spare you my rant. But do let me leave you with this – if you don’t get expert help to spend efficiently, maximize your retirement savings and defer taxes – funding your golf hobby will be the least of your concerns. Retirement can be freeing or devastating. How you experience it, is up to you.