Fixed Income Investments:   (Back to Top)

GICs

	1 year	2 years	3 years	4 years	5 years
B2B Trust	1.70%	2.30%	2.70%	2.95%	3.25%
MRS Trust	1.65%	2.25%	2.65%	2.85%	3.15%
Royal Bank	1.45%	2.10%	2.20%	2.25%	2.30%

Mortgage Investment Corporation

Morrison Laurier MIC has 17 mortgages in the portfolio, mostly in southern Ontario. First mortgages comprise 80% of the portfolio. The investment manager (Morrison) has been in business for more than 25 years, and claims that he has never had a default. The MIC currently has an 8% return, paid quarterly.

The minimum commitment is $10,000. Morrison Laurier has a very flexible redemption policy, subject always to having the cash available.

Canadian Horizons MIC has both a first mortgage and blended product available. I have only offered the first mortgage product to clients because it has superior collateral. Canadian Horizons is more active in Western Canada. At last report they had 48 mortgages in the portfolio, representing close to $100M in value. Canadian Horizons has been around for a while, and has gone through several recessions without reducing payments to investors. It helps, I think, that the President is a former insolvency lawyer, so he knows the business from the other side and what traps to avoid!

Canadian Horizons currently is paying 7.2%, with distributions made monthly. The minimum commitment is $5,000. There is a declining redemption penalty if redeemed within 5 years.

Wine Fund

Prices of the finest vintages tend to increase because there is a restricted supply from the great houses such as Rothschild or Lafite, and over time the wine gets consumed, leaving fewer and fewer bottles available.

There is even a published financial index that tracks the prices of fine wines! The LIV-ex Fine Wines 100 Index has been around for 10 years. Over this admittedly short time, the worst 5-year performance (in CAD) has been 8.9% annualized, while the best was 19.6%.

Wine Investment Fund Canada will purchase wines of recognized distinguished vintages, store them in an insured and bonded warehouse in London, then sell the portfolio at the end of 5 years. They plan to do this annually, so it will be possible to make a "ladder" of vintage wine investments.

This is a 5-year hold, and minimum commitment is a low $5,000. Returns will be treated as a capital gain, and it qualifies for non-registered accounts only.

Seniors Housing

The investor will get a pro-rata part of a syndicated 1st mortgage on all the properties, plus common shares in the operating company. The first mortgage comes due on October 2012, and the overall cash yield is 7.6%.

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

Arizona Real Estate

The objective will be 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.

As part of my due diligence, I flew to Arizona to check out their operation and meet their key people. They have a crew that checks out houses that are up for auction ahead of time, someone who literally bids for the properties on the courthouse steps, several crews who rehabilitate the houses to as-new condition, and a property manager who handles the rentals and/or sales.

This investment has a low minimum threshold, and can be held in a self-directed RRSP.

Saskatchewan Farmland

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

Life Annuity   (Back to Top)

If you don't have a pension plan, a life annuity can serve as a substitute. Life insurance companies offer annuities. In exchange for a lump sum, the insurance company contracts to provide you and your spouse a fixed, continuing, monthly income for the rest of your lives. The payments are ultimately guaranteed by Assuris, the insurance equivalent of CDIC.

Pension plans and government benefits have no estate value; nor does an annuity.

At current interest rates, $100,000 placed into an annuity will give a 65-year-old male an indexed lifetime income of around $500/mo. The more practical option may be a joint last-to-die annuity, with payments rising over time with inflation. $100,000 placed into a joint annuity indexed at 2% will give a couple both aged around 65 an initial income around $430/mo (rising by 2% each year).

These quotations illustrate the incredible value that a government pension offers to a civil servant. Angela recently retired from teaching. She qualifies for an indexed $4,300/mo pension. Her sister, Adele, worked as an interior designer, and has no pension. Adele needs to have a $1,000,000 RRSP to get an annuity income that is equivalent to Angela's pension.

Guaranteed Retirement Income Portfolios (GRIP)   (Back to Top)

• guarantees you a minimum 5% annual return on your equity investments every year;
• offers a reset every 3rd year if stock markets happen to do better than 5%;
• gives you a guaranteed lifetime minimum withdrawal benefit at 5% of the account value at the time of the first withdrawal;
• offers resets on your withdrawals every 3rd year if the markets value of your portfolio is higher than the initial amount; and
• offers the ability to pass this pension-like benefit to your spouse upon death.

The insurance company that underwrites the GRIP guarantees that if you leave your funds untouched in a year, you will obtain the higher of the market value or a 5% simple return on your investment. The plan allows resets every 3-5 years if the market value exceeds the Guaranteed Minimum amount.

Suppose you put $100,000 into a GRI product, and left it for 10 years. At worst, the notional account value will be $150,000 ($100,000 initial capital + 10 x $5,000 per year) at the start of the withdrawal phase. At best, the notional value will equal the market value of the underlying investments.

In the Withdrawal phase, the insurance company guarantees that you can take out 5% of the notional account balance at the start of the withdrawal period for the rest of your life.

Using the worst-case example shown above, if you have $150,000 at the start of retirement, the insurance company will guarantee an income of $7,500/yr for the rest of your life. It makes sense to invest a GRIP fairly aggressively even in the withdrawal phase. If the market returns prove to be greater than the withdrawals, the GRIP resets every 3-5 years, and your guaranteed minimum withdrawal will rise. With luck, you should be able to get a 5% withdrawal rate on your retirement capital, rising more or less in line with inflation.

GRIPs are an interesting and valuable tool. In effect, they are a perpetual fixed income investment yielding 5%, with potential for increased returns depending upon the performance of the underlying investment. Because of the guarantees, they may encourage someone to invest a little more aggressively than they would if they were investing in a non-guaranteed balanced fund. A GRIP may be appropriate for you. Call me at 403-616-3434 for a more detailed explanation.

Mortgages   (Back to Top)

Self-Directed Mortgages

This is an often-overlooked source of financing. It’s also a good way of gaining fixed-income content within a self-directed plan.

It's not for everyone, but give me a call to find out if it is suitable for you. Or check out my Give Yourself Your Mortgage! article.

Mortgage Referral Service

There's no cost to use the services of a mortgage broker. Give me a call when you're in the market for a new or refinanced mortgage!

Insurance   (Back to Top)

Segregated Funds

• Offered by most life insurance companies and several mutual fund companies.
• Guarantee at least return of capital after 10 years or upon death.
• Variety of "reset" options to capture stock market gains.
• 100% return guarantee applies only to the most conservative investment options; equity based investment choices offer only a 75% return guarantee over 10 years.
• Equity-based investment choices may offer only a 75% death benefit.

Check out my article Stock Market Insurance in Canadian MoneySaver!

Term Insurance

Your future earning power is your major financial asset. Insurance that protects this asset is one of the essential cornerstones of a good financial plan. While Group coverage is good, you might become independent in the future. It is prudent to get individual insurance while in good health - it's cheaper than you think!

• The term chosen for insurance needs to match the term of the risk; for example if we want life insurance protection to cover the period while children are growing up, we will typically need 20 years of coverage. So we should get "20 year term".
• If you have "mortgage insurance" as part of your mortgage payment, and you've had the house for a while, you may find that private life insurance is cheaper than the bank-supplied mortgage insurance.
• Term insurance should be "renewable" and "convertible".
  • Renewable means that you can extend the policy without reapplying, and without the need for a medical exam;
  • Convertible means that the policy can be changed to permanent insurance at your option, should your needs change in the future.
• The cost of insurance upon renewal is very high. When a policy comes up for renewal, you can either renew, or shop for a new policy. If you are in good health, it is cheaper to take a medical exam and buy a new policy. If in bad health, you renew. This characteristic, known as "adverse selection", means that the insurance company is stuck with a pool of bad insurance risks who renew, while the good risks leave. This is a vicious circle, and the insurance companies have had to dramatically increase their renewal rates to compensate for the risk.
• The renewal dilemma works for Term Insurance offered by professional societies and unions too. Once you are over the age of 40, the plans sponsored by such societies as APEGGA are more expensive than private coverage. This is particularly so if you have better-than-average health! The following chart shows the difference between the Canadian Council of Professional Engineers (CCPE; umbrella group for provincial associations such as APEGGA) group term policy, and standard private term insurance.

Universal Life Insurance

• While an estate passes tax-free to a spouse, Revenue Canada wants its cut when an estate is to pass to a child or others. All assets are deemed sold at fair market value at time of death; as a result most assets are taxed at your highest marginal tax rate.
• UL is very useful when you want to leave a substantial estate to your heirs or to charity. The insurance proceeds pay the tax bill, leaving the estate intact. UL also is useful if there are multiple heirs, and a single large illiquid asset such as a family business or cottage. One child can receive the cottage (plus sufficient cash to pay the taxes due), while the other children receive cash proceeds from the insurance policy.
• The UL policy owner assumes an interest rate risk. The cost of the policy is very sensitive to this interest rate assumption. If returns are better than projected, the cash reserve builds up, increasing the owner's options. On the other hand, if returns are less than projected, the owner may have to increase the funding of the policy to keep it in force. Therefore, you always want a UL projection to be made on a very conservative basis - never more than 6%!
• UL can be very cost-effective, even when used to protect against a temporary need. The next chart shows the net cost of a UL policy that I designed to be fully funded at age 65. The net cost is premiums paid, less the cash surrender value. At age 65, the cash surrender value is far higher than the cost of 20 years' premiums!

Disability Insurance

• You must have demonstrable income before you can qualify for DI. Independent consultants and business people typically need to show 2 years of business income.
• DI provides an income to cover earnings lost due to total, residual, or partial disability.
• A skilled or professional person needs "own occupation" DI.
• The exclusion period is the time between onset of disability and when DI payments begin.
• Cost of DI rises rapidly with decreasing exclusion period. The recommended exclusion period is between 90 and 180 days.

Critical Illness Insurance

CI pays a lump sum amount upon diagnosis of any of a number of serious illnesses. Cancer, heart attack and stroke are the most common covered illnesses. CI offers us a 4-way play:

• Top-notch CI policies offer the Best Doctors referral service, which provides for diagnosis and recommended treatment from the leading specialists in the world;
• If we are unfortunate enough to get a serious illness, the policy will pay us a lump sum amount that we can use to get immediate treatment anywhere in the world;
• If we remain healthy, upon maturity the policy will repay us all of the premiums that we paid over the life of the policy. Our only cost has been the opportunity cost of those premiums!
• If we should die from some cause not covered under the policy, our estate will receive the return of all premiums that we had paid. For a single person, this is all the life insurance that they generally will need.

Mortgage Insurance

Other Opportunities   (Back to Top)

Charitable Donations

Example #1:
John Smith has a generous heart. He heard that his local hospital was making a special fund-raising drive in order to obtain some new equipment. John wanted to make a substantial contribution to the cause.

He had 1000 shares of ABC Resources that he had purchased for $10/share. The market value rose to $100. If he sold the shares for proceeds of $100,000, he would have had a taxable capital gain of $45,000 (half the capital gain of $90K). He would need to keep $17,500 aside to pay the taxman, so he would only be able to donate $82,500 to the hospital fund.

Instead, John donated his 1000 shares of ABC Resources to the hospital, and the hospital subsequently sold the shares on the market. The hospital received $100,000 from the sale, and John received a donation tax slip for $100,000. No capital gains tax was payable.

By donating the shares instead of cash, the hospital received a larger donation. John had a warm feeling in his heart and he received great accolades for his generosity. The bigger donation tax credit was a bonus!

Example #2:
Alice Wilson has a charitable heart, and also wanted to contribute a substantial amount to the hospital fund.

Unfortunately, she had a somewhat smaller wallet than did John Smith. She heard, however, that it was possible to use Flow-Through shares to create something called "The Triple Dip".

If you've been reading my earlier newsletters, you'll know that a Mining Flow-Through gives the investor a write-off of their initial investment against their income (same as an RRSP contribution), plus an additional 15% tax credit that is applied directly against taxes. Depending upon the investor's tax bracket, the after-tax "at-risk" money is around 50¢ on the dollar.

Alice purchased $10,000 of a Mining Flow-Through limited partnership that was scheduled to dissolve after 18 months, with the partnership interest converting into units of a mutual fund. She was able to get a tax refund of $5,000 the following April because she had made this investment.

18 months rolled by. The limited partnership converted on schedule into the mutual fund. The venture was only moderately successful, and Alice received $10,000 in mutual fund shares - the same amount as she had initially invested.

Alice had a problem. She wanted to donate the full $10,000 to the hospital fund, but if she sold the mutual fund she would have a big capital gain. One of the rules of flow-throughs is that the Adjusted Cost Base of the flow-through shares is zero. Should Alice sell her shares, she would be subject to capital gains tax on half her entire proceeds, or $5,000.

Her solution: she donated the mutual fund shares to the hospital fund! The hospital sold her mutual fund for proceeds of $10,000 and placed Alice's name on the plaque of Special Benefactors. She received a donation slip for $10,000, and the following April got a tax refund of $3,000 because of the donation tax credit.

Alice made a real difference to the hospital through her generosity, but her after-tax cost was only $2,000 - well within her annual budget for charitable donations!

Example #3:
Bill and Melinda Gates have one; so can you. I'm talking about a Family Charitable Foundation. Doesn't something like The Jones Family Charitable Foundation have a nice ring to it? Kind of makes you feel you're right there with Bill and Melinda, doesn't it! One of the mutual fund companies - Mackenzie - has made it easy for you to establish your own personal Charitable Foundation without requiring Gatesian gobs of money.

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 $10,000 (cash or marketable securities), and 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 $10,000 and the United Way will receive $500 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 up 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".

All-Inclusive Banking Service

Most importantly, it includes your mortgage! Any bank deposits that you make are immediately credited against your mortgage balance, lowering the interest that would otherwise be payable.

By making use of this type of banking/mortgage account, clients are reducing the length of their mortgage commitment (and therefore the amount of interest expense) by 25-50% with no change in the cash used to pay the mortgage.

The concept, though new to Canada, was started years ago in Australia and is now a proven way to bank. It commands about one third of all new mortgage loans in Australia.

Flow-Through Shares

Junior oil & gas and mining exploration companies can "flow through" their Canadian exploration expenses (CEE) to their shareholders, who can deduct those expenses against their other income. In addition, the federal government offers a 15% tax credit on mining exploration expenses over and above the CEE.

What does this mean to you?

Here's a hypothetical example: Say you have income of $150,000 and a marginal tax rate of 39%. You place $10,000 into a flow-through offering that provides $9,000 of CEE. Your taxable income will drop to $141,000, lowering your tax bill by $3,510. The 15% federal tax credit provides additional tax relief of $1,350, for a total tax saving on your 2005 tax return of $4,860 on an investment of $10,000. You also still have $10,000 worth of junior mining shares that have the potential to rise in value.

I prefer mining flow-throughs to the energy-based ones, primarily because the super flow-through feature is only available for mining exploration. My favoured issuer provides excellent opportunity and investor-friendly features. The limited partnership will rollover in 18 months, an exceptionally short time for flow-through entities. The general partners will not be taking any management fee; instead they will take their cut only after the investors have fully recouped their initial investment.

All junior mining shares purchased by the partnership must be with companies listed on the TSX or TSX Venture exchange, providing excellent liquidity and transparency. The geological consultants that the general partners have hired have an excellent global reputation.

Please give me a call for further information.

Loan Programs   (Back to Top)

First-Time Home Buyer's Plan

• Borrow funds from your RRSP for the down payment on your first home
• Does not affect future RRSP contribution room
• No repayments for 2 years; then up to 15 years to pay back the loan
• The interest-free loan can hurt the growth of retirement savings in your RRSP, so it is best to pay the loan off quickly

Lifetime Learning Plan

• Designed to fund full-time "back to school" education
• Operates similarly to the First Time Home Buyer's Plan

RRSP Loans

Investment Loans

1. multiple lenders are now competing for your business;
2. loan terms have recently become more flexible, and interest rates have dropped substantially;
3. up to 100% financing is possible on an interest-only basis;
4. many loan options are not subject to any margin call;
5. many mutual funds have fixed monthly distributions that can be used to pay the interest charges and amortize the loan principal.

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