We met our son at the airport a couple of days ago, as he passed through Calgary on his way home from his latest foray into Saudi Arabia. He'll be home for a while, as he and Kelly-Anne are expecting their first child - our first grandchild - in February. There are other big changes coming in their lives. The engineering company that he works for has given him a big promotion and offered a transfer to Ottawa where he'll be Director of Planning for the Capital Region, plus business development responsibilities within the firm's international division. Not bad for someone only 32 years old! We are very proud that both of our children are well on their way in this world! Carmen and I will be on our own this Christmas, but not alone. We are very fortunate to have a wonderful and caring circle of friends.

Doctor Wise's Flu Clinic

Tax evasion is illegal; tax avoidance is every citizen's duty

Tax Shelters

Flow-throughs give you the same tax benefit as an RRSP: you can deduct the cost of the investment against your taxable income. A Mining flow-through gives you an additional 15% tax credit - that's a direct reduction on the taxes that you have to pay! Put the two benefits together, and your after-tax cost is only 50¢ on the dollar, into a sector that still has a long way to recover from last year's market mayhem.

Does an investment in junior mining stocks make financial sense without the tax breaks? I can't guarantee future profit, but here is how we've done over the past few years:

• In 2005, the partnership dissolved after only 6 months with a $10,000 investment worth $13,932.
• In 2006, the partnership dissolved after only 6 months with a $10,000 investment worth $11,320.
• In 2007, the partnership dissolved after 20 months with a $10,000 investment worth $3,769.
• In 2008, the partnership dissolved after only 7 months with a $10,000 investment worth $12,092.

Our favourite supplier is offering RRSP loans at Prime + 1.75%.
That's only 4% right now!

Suppose you take out a $6,000 RRSP loan in February, with the proceeds placed into a money market fund so that there is no market risk. If you're in the 33% tax bracket, this will give you a $2,000 tax refund, which you'll use to pay down the loan principal.

You have chosen a 1-year amortization of the loan, and have deferred payments for 90 days. By that time you'll have received your tax refund and paid down the loan, so the outstanding principal is only $4,000. You make 8 monthly payments of $512 and a small 9th payment, and you've retired the loan in time for the following February.

Your invested amount is $6,000; your out-of-pocket cost (including interest) is $4,135. The return on invested capital is a cool 45% - government-guaranteed! You can scale the numbers I've used in this example up or down to meet your personal circumstances, but you'll always get that 45% return. Keep this in mind this RRSP season!

Our favourite supplier is offering 3:1 investment loans*, interest only, no margin call at Prime + 0.75% for amounts greater than $100,000. Mutual fund distributions can be used to pay the interest charges.

* In a 3:1 loan, the lender provides $3 for every $1 of collateral supplied by the borrower.

There are two basic approaches that we can use: borrowing for income, or borrowing for growth. The first approach is equivalent to purchase of a rental real estate property; the second is akin to buying raw land.

When we borrow for income, we are looking for an investment that gives us a cash yield, paid monthly, that exceeds our interest expense. We use the excess income to slowly pay down the loan principal, so that in 10-20 years we'll own the property outright. Any capital appreciation is a bonus.

The great advantage of this approach is that there is no impact on our current lifestyle, since the loan is self-financing. In the approach that I recommend, we invest in a special class of mutual funds that pays a fixed 8% cash return. It is also highly tax efficient, so that little of the income needs to be reported in the year received; instead it will be taxed as a capital gain upon sale of the investment.

When we borrow for growth, we can let the magic of compounding allow our investment to grow exponentially. At a 9% growth rate, the investment will double in value every 8 years. The flip side is that we'll need to pay the interest expense out of our own pocket. Note that, strictly speaking, this strategy does not conform to the Income Tax Act's wording of "for the purpose of generating income".

However, the courts have interpreted this provision generously, and have generally allowed the interest cost on a loan used to purchase a non-income-producing asset to be deductible. Most mutual funds report sufficient interest or dividend income to be onside with the taxman.

Your Personal Charitable Foundation

With a Charitable Foundation, you receive a donation tax credit for the money that you put into the Foundation as seed money. Each year, the Foundation then proceeds to distribute the investment earnings of the fund to the charities of your choice. The initial capital remains in the Foundation to continue to grow. Note that you receive the tax slip when you put money into the Foundation, not when the Foundation distributes the earnings to the charities.

Suppose you establish The Jones Family Charitable Foundation through Mackenzie's facility. You fund it with an initial contribution of $25,000 (cash or marketable securities), and decide where the money should be invested. You set a distribution policy that 5% of assets will be disbursed each year to your local United Way (the choice of charity is up to you, but 5% is the maximum level of allowable disbursement). You will receive a donation tax slip for $25,000 and the United Way will receive $1,250 as the earnings from the Foundation.

You can add funds to the Foundation each year, receiving a tax slip for each contribution. In turn, the Foundation will be in a position to distribute enhanced funding each year to your designated charities. Furthermore, the Foundation is separate from your estate, so your children can continue to build your Foundation to become a real force for good in your community.

Are you interested in bringing order to your charitable giving, and creating a legacy? Please give me a call to discuss how we can establish "The (your name here) Charitable Foundation".

The Port Strat Gang at Whistler: George, Marilyn, Carmen, Mike, Linda & Jim

Go Stamps Go!

Alternative Investments

Most of the alternative investments that we offer have an income component, and are ultimately backed by real estate.

Innovative Events LP provides front-money to bring
world-class entertainers on cross-Canada tours

Innovative Events Limited Partnership gives you a foothold in the entertainment industry. The LP will provide front-money to bring around 15 high-profile speakers, comedians and musicians on cross-Canada tours over a span of 5 years. The partnership will provide the initial capital, but a Calgary-based events management group will be responsible for all details of putting on the shows. The partners will receive an accounting after every tour.

Profits from the events will be split 60/40 between the partners and the impresario, and distributed annually. The General Partner has sufficient faith in the partnership that he will only receive a return once the limited partners receive more than 15% per annum (NOT guaranteed!) on their invested capital. Original seed money will be returned after 5 years.

This limited partnership has (I think) good separation between the partnership and the events manager, and the manager has personal reasons (beyond the potential profits) for working hard to make the partnership a success. Minimum subscription will be a very low $5000.

Mortgage Investment Corporation
We have on offer a Mortgage Investment Corporation that provides short term construction financing to developers across Canada. Projects are mainly in Ontario, Alberta and BC. The MIC pays monthly distributions and is RRSP-eligible.

Returns are in the 8% range. It is a tribute to the company's risk control procedures and wide geographic dispersion that distributions remain steady despite the recent real estate upheaval.

Second Mortgages in the Calgary Area
We are offering shares in a Mortgage Investment Corporation that is in the business of providing 2nd mortgages to homeowners in southern Alberta. The MIC has more than 300 properties in the portfolio, and individual loans tend to be fairly small.

Second mortgages are obviously higher risk, so yields to investors are in the low teens.

Seniors Housing
We are offering clients the opportunity to invest in a Calgary-based company that builds and operates seniors' residences in smaller centers in western Canada. Investicare Seniors Housing Corporation has lodges in operation in Red Deer, Airdrie, and Claresholm, and projects underway in Kelowna and Cochrane.

The investor will get a pro-rata part of a syndicated 1st mortgage on all the properties, plus redeemable preferred shares in the operating company. The first mortgage comes due on 30 September 2014, and the overall cash yield is 7.0%.

This investment may be held in a self-directed RRSP, and the minimum is $12,500.

Land Development: Calgary & Colorado
We have a mutual fund trust on offer that provides debt financing to a land developer who purchases raw farmland, takes the land through the subdivision and permitting process, installs the services, then sells individual lots to developers or individuals.

Current projects are in Pueblo, Colorado, and Bearspaw, near Calgary. The Pueblo project is a massive staged subdivision in one of the few US cities that is still growing. The early stages are now in the selling phase. The lot sales provide the income that flows back to the investors.

The firm is developing 4 quarter sections in Bearspaw. The municipal government is supporting the idea of a "Bearspaw town centre" on one of the parcels.

According to the principals, the development company is aiming to double their investment over 3 years (ie a 30% annualized return on invested capital). The plan is to give the investors an 11.7% annual return if paid annually, or 11.2% if the investor prefers quarterly payments. The payment can be reinvested if desired. Investors have unlimited redemption rights, with a 5% discount if funds are redeemed in the first 2 years.

This investment is RRSP-eligible, and minimum is $10,000.

Arizona Real Estate
We now have an opportunity that allows you to participate in the depressed Arizona real estate market. This Calgary-based corporation is investing in foreclosed single-family houses in the southeastern quadrant of Phoenix (the Mesa/Chandler area). This is a popular area, and despite high foreclosures the vacancy rate is low.

The objective is to acquire a portfolio of properties, rent them to give investors a 4% cash yield, and ultimately sell the properties whenever real estate values recover.

The company is able to buy their houses literally on the courthouse steps at a substantial discount to "retail" value. Even in this distressed market, the estimated break-up value of the portfolio is higher than the purchase price.

Saskatchewan Farmland
We're now able to offer you the opportunity to invest in Saskatchewan farmland. Saskatchewan land is substantially cheaper than equivalent land in Alberta because provincial laws restrict ownership to Canadians. While Saskatchewan farmland has steadily appreciated in value over the years even with this restriction, were it to be lifted at some point during the hold period the value of Saskatchewan land could triple virtually overnight.

The limited partnership will purchase productive land, primarily in Saskatchewan, and lease it to farmers. During the hold period, the investor will receive a 2.7% cash yield. The land will be sold at the end of the partnership's term, with initial capital and any capital gain from the sale returned to the investors.

This investment may be held in an RRSP. The minimum commitment is $10,000.

Tax Free Savings Accounts

Highlights of a TFSA:

• Individuals can deposit $5,000/yr into their TFSA, with no spousal attribution rules. The eligible maximum is supposed to increase each year;
• Unused contribution room accumulates;
• Unlike an RRSP there is no tax deduction for a TFSA contribution;
• Interest, dividends and capital gains accumulate within the TFSA on a tax-free basis;
• Withdrawals from a TFSA do not attract any tax;
• TFSA withdrawals do not affect the annual contribution limit. Furthermore, the withdrawal can later be redeposited, also without affecting the contribution limit.

• Saving for a major purchase - interest on funds in a TFSA savings account won't get taxed;
• Retiree - required withdrawals from a RRIF that are in excess of the funds needed for living can be placed in the TFSA and not attract further taxation;
• Income splitting - TFSA is a way to get $5,000/yr into a low-income spouse's hands.
• High-income Individuals - while there is no tax deduction, the investments in the TFSA won't get hit by tax on the investment returns.
• Low-income students - deposit any extra funds (or funds from parents) into a TFSA, then withdraw the money in higher-earning years for deposit into an RRSP.

For your own sake, please don't make the same mistake this year! Talk to me first!

Table 1
2009 Returns to 30 September

MSCI: Morgan Stanley - Capital International
EAFE: Europe, Australia & Far East
Globe: Globe & Mail

Where We Are

Interest rates remain steady at very low levels. Dr Ben Bernanke, Chairman of the US Federal Reserve, reiterated in a speech on 16 November that the Fed sees a very weak recovery, and that interest rates will remain low for "an extended period".

Most clients have balanced portfolios. I use the Globe Canadian Neutral Balanced Peer Index as my primary performance benchmark. This index was up 14.8% to the end of September.

Within sectors, Emerging Markets was the star, up 46.2% year to date, followed closely by Natural Resources at 44.3% and Precious Metals at 43.3%. Financial Services, at 32.7% and Technology, +30.0% on the year, are doing very well. Real Estate is up 18.6%, while Health Care lags the field, up only 7.5% on the year.

Where We're Heading

CAD/USD = 0.005 * (oil price) + 0.56

Parity will occur when (or if) WTI oil reaches $88/bbl. There's little that the Bank of Canada can do to affect this.

Conditions

Not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. All a man needs to know to make money is to appraise conditions.

Edwin Lefevre, 1923
Reminiscences of a Stock Operator

The news media, when not scaring us about swine flu or other diseases, tries to scare us with terrible economic news. We need to remember that the stock market has, in fact, only a tenuous relationship to the economy.

The unprecedented flood of government cash flooding into the global economy, coupled with extraordinary low interest rates, have made conditions extremely bullish, despite a rather alarmingly bad economy.

We have ended up in a situation in which the stock market is not rising in spite of a weak economy; it is rising because of a weak economy!

Fortunately, I've made sure that clients always have equity exposure in a balanced portfolio, so virtually everyone has participated in the huge market recovery that we've enjoyed this year.

I've already quoted the Fed Chairman that interest rates will remain low for an extended period. I have argued in previous letters that the US government will keep interest rates low at least through 2011. Keep in mind as well that President Obama is up for re-election in 2012.

Mark Carney, Governor of the Bank of Canada, has gone on record to say that the Bank is unlikely to raise rates until the middle of next year at the earliest. His bigger concern is the exchange rate, and raising interest rates would make the problem worse instead of better.

Government stimulus money, in both Canada and the US, is scheduled to increase in 2010 versus this year. Every government official around the world has, in official statements, emphasized that the global economy is still in trouble and support by government is essential to keep the world away from a global depression.

From this, we can assume that conditions will remain bullish for a considerable time. We can also assume that at some point in the future the stimulus taps will be turned off, and interest rates will rise. The merry-go-round will stop. At that point, but only then, will conditions turn bearish. In the meantime, we should enjoy the ride.

... the level of distribution for virtually all trust-based mutual funds will decline over the next year.

Income Trust Taxation

The federal government has sweetened the dividend tax credit to soften the blow for non-registered investors, but those who hold trusts within their RRSPs will lose.

Many trusts have already converted to a corporate structure, and we can expect a flood of conversions throughout 2010. Unfortunately, in many cases management is taking advantage of the conversion to reduce their payout to investors.

Income trust-based mutual funds are in the process of determining their future investment policy. Typically they will become standard Canadian dividend equity funds, holding the securities of dividend-paying companies. Crucially, that means a greater reliance on capital gains to fund the distributions.

Distribution policy is all over the map, but it is safe to say that the level of distribution for virtually all trust-based mutual funds will decline over the next year. This has huge implications for retired clients who are relying on those distributions to put bread on the table, and for clients who have investment loans, for whom the distribution was a way of amortizing the loan.

All of this remains in flux, and I will be contacting everyone affected once we know how each mutual fund will make the changeover.

Currency Exchange

The best place I've found for currency conversion and wire transfers is Custom House Currency Exchange (tel: 403-571-6000). I deal with Andrew Endl. Custom House has to deal with the anti-terrorist and anti-money laundering laws, so is careful about walk-in clients. Should you have a need for conversion or wire transfer of a larger sum of money, please give me a call, and I'll introduce you to Andrew.

Custom House can save you several percent over what the banks charge - a significant difference if you are transferring 5 or 6-figure amounts.

Travel Insurance

Not too long ago, one of my clients called in dismay. Her aged parents, who have health problems, needed to get away from rainy Vancouver to the sunshine and warmth of Palm Springs. But all the travel insurers she knew of wouldn't touch the case because of age and health issues. Could I help?

My supplier was able to provide insurance at a very reasonable cost, and the parents are currently enjoying their poolside villa in Palm Desert, basking in the warmth and sunshine while listening to the news reports of miserable flooding in Vancouver!

So give me a call if you are in the market for travel insurance; I may be able to help.

End of Summer

Raven

What's Important to You?