Artisan Spring 2012
- 1. THE ARTISAN Issue: Spring 2012 The Artisan Issue: Spring 2012 Quarterly Newsletter by Northland Wealth Management The Markets: Update & Old Age Security Eligibility Outlook Page 3 Hold On To Your Hat 1 Hold On To Your Hat … wide swings in day-to-day markets, exaggerated by computer While this Newsletter will focus on the near term economic and driven trading, even when there has financial prospects, readers should remember that there are still in place been no new fundamental news… strong longer term trends that will influence near term prospects. As was described in an earlier Newsletter “The Great Deleveraging” the Western World has accumulated significant debt that must be What’s New: substantially reduced before new strong growth cycles can begin again. Origins & How these debt problems are handled will have an ongoing influence on economic growth and financial markets. It is important to recognize Understanding that this is no ordinary debt cycle. Economic slowdowns typically are caused by individuals and/or corporations overspending by borrowing In·di·vid·u·al Pen·sion Plan 2 and not being able to service the debt they have taken on. In this (IPP) – noun particular cycle it is governments as well as individuals that are “a type of defined benefit pension plan burdened with too much debt. The corporate sector as a whole is in best suited to owners of incorporated much better shape than normal in a period of slow growth. The general businesses and professionals” excellent health of the cash laden corporate sector is a fact generally ignored by the doomsayers. The low interest environment created by central banks and government policies is a major positive for Brush Strokes: corporations. Painting the Turning to recent events and progress being made in handling the debt Perfect Garden crises, Europe stands out as a work in progress. The Greek refinancing, after spending weeks at the brink of failure was accomplished. Greek (continued on page 2) All gardening is landscape painting 6 . – William Kent Perspectives: “A dollar is not necessarily a dollar” Insight on Taxation of Investment Income Planning Files: Depending on what category your Reducing Your investment income falls into, there are Probatable Estate different, and sometimes beneficial, tax treatments to the different To probate or not to probate; categories. Investors are often focused that is the question. 8 on the bottom line, but rarely are they focusing on the after-tax bottom line returns. At Northland Wealth Management we strive to improve after-tax returns for our clients. After all, it is not what you make on your investments; it is more about how much is left in your pocket after the tax man has taken his share. (Continued on page 7) 1
- 2. Issue: Spring 2012 The Artisan (Continued) debt holders took substantial losses while the Greek government was strong-armed into adopting severe cost cutting measures. As part of this process, the European Central Bank pumped new liquidity into the European banking system, so for the moment there is relative calm in Europe. While there are signs of economic weakness in some members of the union, Germany, the power house of Europe, has recently been generating positive economic numbers. Predictions of a European recession have become more muted, but it is still a strong possibility. Is the debt overhang problem solved? Not by any means. Portugal, The Irish Republic, Spain and even Italy are far from fully solvent. While the European What’s New: banking system is in better shape than it has been for some time it is far from robust. Greece is also just treading water, still running large deficits and very likely Origins & in need of another future bailout. An upcoming Greek Understanding election will probably bring in an anti-austerity government that will opt for default rather than payment. It seems that corporate Canada can’t do away with While the EU is now well enough buttressed to withstand its defined benefit pension plans fast enough. But such a default, the problems of Spain pose a much greater for the independent business owner, they’re an challenge. Spain’s unemployment level is 23%, and attractive option - if the plan-holder is the business amongst younger Spaniards is 51%. Spain experienced holder. the most excessive real estate boom, and foreclosures are rising. Regional banks are weighted down with real An Individual Pension Plan (IPP) is a registered, estate loans and many may not survive despite efforts by defined benefit plan available to incorporated the central government to consolidate the Regional banks business owners and professionals. Contributions into stronger entities. While Spain is no Greece, its are made through the corporation based on annual problems will take years to solve and this will be the same income, age, and years of service. IPPs maximize for other weaker members of the European Union. The retirement income savings by benefitting from the stronger members such as Germany, France, and the enhanced funding under Canada Revenue Agency Scandinavian countries will strive to keep the Union (“CRA”) guidelines. together. They may well be successful but the uncertainty of their survival will continue to impact world financial WHAT ARE THE BENEFITS OF AN IPP? markets for the foreseeable future. Guaranteed funding (continued on page 3) Defined retirement income stream Indexation for inflation Creditor proofing Estate planning Tax deductible past-service contributions for earnings since 1991 IS AN IPP RIGHT FOR YOU? If you… are an incorporated business owner or professional, ideally over 40 years of age 3) and receive significant employment income from your company (T4, T4PS) Greece is also just treading water, still running large deficits and …an IPP can work for you. very likely in need of a further future bailout. 2
- 3. Issue: Spring 2012 The Artisan (Continued) In North America the economic outlook is much less uncertain. The U.S. has put together a string of quite good economic numbers. Car sales are up, consumer confidence has improved and employment numbers are edging upwards. The housing market is firming in some localities and appears to be bottoming, but is still far from robust. Interest rates remain very low which is good for borrowers but bad for savers. U.S. banks are still contending with the overhang of bad mortgage loans in their investment portfolios, but are in much better shape than a year ago. U.S. politics continues to be negative with the protracted Republican primaries focusing on all that has gone wrong in the U.S. in the last four years. Long term debt issues remain, and must be dealt with in the next several years, whether by additional taxes or spending cuts, or both. The political 2012 Federal Budget divides on these issues will continue to dominate U. S. politics. Special Report: In Canada the economic environment is lackluster, with Old Age Security Eligibility GDP growth trailing that of the U.S., but still on the The 2012 budget is proposing changes to the OAS positive side. In other comparisons against the U.S., system to ensure that it continues to be sustainable. Canada is in much better condition. Our The OAS program is financed from the unemployment is lower, our banking system is government’s general revenues and provides a considered the best in the world, and our stable majority monthly pension to nearly all Canadians age 65 Federal Government has set in place a Federal Budget years of age or over. The 2012 federal budget designed to balance the Budget in several years. The proposes to change the age of eligibility for OAS Canadian housing market has held together extremely benefits, to be phased in gradually, starting in 2023. well, but could be vulnerable to rising interest rates. As well, the budget introduced the option to defer Under some pressure from the regulatory authorities the OAS pension and receive an actuarially adjusted lending institutions have been tightening mortgage pension, beginning July 1, 2013. borrowing requirements. Canada is dependent on its resource sectors as a national growth generator in a OAS is the single largest government program. It was put into place when Canadians were not living (continued on page 4) as long. For example, in 1970, life expectancy was 69 years of age for men and 76 for women – today, it’s 79 for men and 83 for women. The government therefore estimates that the cost of the OAS program will grow from $38 billion in 2011 to $108 billion by 2030. In addition, in the 1970s, there were seven workers for each person over the age of 65. Today, there are four workers per senior, and in 20 years, based on estimates of Canada’s declining birth rate, the government projects that there will be only two workers for every 65-year old. OAS Age of Eligibility: It’s proposed that the age of eligibility for OAS and the Guaranteed Income Supplement (GIS) will be gradually increased from Important Notice 65 to 67, starting in April 2023, with full 2011 Income tax return filing deadline. implementation by January 2029. This 11-year Personal Income Taxes have to be filed notification period, followed by a six-year phase-in period, will provide individuals with significant on or before Monday April 30th, 2012. (Continued on Page 5) 3
- 4. Issue: Spring 2012 The Artisan (Continued) world where manufacturing continues to shift to lower cost The Global emerging economies. China, the source of a majority of world demand growth for commodities, continues to expand. Landscape: While Chinese growth has recently slowed to 8% to 9% level, Risk levels - The past several years has seen global in absolute terms 8% growth on an already large demand financial managers take action to reduce their base produces big increases - enough to keep supplies of exposure to the risks of financial market contagion. many commodities tight. Recent Chinese monetary While the failure of a sovereign credit will be painful tightening to combat a real-estate bubble appears to be it will not cause the system to collapse. The lessons ending. This could well signal easier fiscal and monetary of the Lehman failure are still fresh in the minds of conditions and a return to double digit growth and higher the financial community and the appetite for risk is demand for commodities in 2013 - a positive development for still subdued which is a positive element in viewing Canada. financial markets. Europe – Germany, despite some considerable resentment within the EU, is pushing the restructuring of the EU to achieve more stringent standards of fiscal and monetary management. Germany’s own self-interest is tied to the survival of the EU as Germany has prospered within the Union and has found pricing its export products in Euros a great sales advantage. The question remains as to whether there is the political will on the part of the free spending members of the Union to change their ways. Emerging Economies – While there is a tendency to focus on European and North American economies or the larger emerging economies of Brazil, Russia, India and China, many smaller economies are growing at excellent rates. In the Americas, Mexico, Given the foregoing views, what predictions can be made as to most of Central America, and many countries in the future course of events and their impact on the South America, such as Chile and Columbia, are performance of financial markets? prospering. In the Far East, there is also good economic progress producing predictions for total Europe – The struggle to keep the European Union together Global growth close to 3% for 2012- not a bad will continue, accompanied by screaming headlines at every number at all! missed step. Financial markets will swing between hope and despair in both Europe and North America - in other words China- A key element in any economic forecast is markets similar to what we have experienced in the last year. Chinese growth. Many forecasters do not seem to While Greece has managed to obtain recent rescue financing, understand that China is a managed economy. While free enterprise plays a role in the Chinese it is unlikely to be able to meet the stringent conditions of that economy the big decisions are made by the financing and will not remain in the European Union. Enough government. To accommodate the millions of progress has been made in shoring up the European banking Chinese that must be moved from unproductive rural system in anticipation of such an event as Greece leaving, that jobs to higher paying urban jobs requires new the EU will survive the Greek departure. Ireland helped by housing and infrastructure. Backed by a population UK support will make it through. Portugal will definitely be a that saves and huge foreign exchange reserves, the problem - how large will be determined by the success of its Chinese government will create growth. recent austerity programs, but Portugal is a relatively minor player. Spain is a larger problem and again only time will tell In the US and Canada economic progress will be slowed by government cut backs. A healthy and cash if the Spanish population will accept the belt tightening laden corporate sector will continue to be cautious required to reach a balanced budget. Italy is potentially in about hiring but aggressive about takeovers. Politics financial trouble, but with a new government and its austerity will dominate in the US in advance of the November plans, coupled with the high personal wealth in the country it elections. should soldier through. The road ahead for the EU is thus a perilous one full of potential crises. (continued on page 5) 4
- 5. Issue: Spring 2012 The Artisan OAS Age of Eligibility by Date of Birth – Source: Government of Canada, Economic Action Plan 2012 (Continued) Old Age Security Eligibility - Continued from Page 3 North America – The US and Canada will continue to advance notification to plan their retirement and experience slow growth aided by low interest rates and make adjustments to their savings plans. In other recovering domestic demand as employment improves. words, the proposed legislative change to the age of The US will continue to struggle with its debt problems OAS/GIS eligibility won’t affect anyone born on or and its housing markets. The US banking system before March 31, 1958. If you were born on or after however is now recovered to the point that it can be a February 1, 1962, your OAS/GIS eligibility age will positive economic force. Canada will continue to suffer be 67. Canadians born between April 1, 1958 and the fallout of US slow growth and depend on commodity January 31, 1962 will have an age of eligibility demand for its growth stimulus, but there will be growth. between 65 and 67, as indicated by the chart above. Despite positive trends in corporate earnings and Option to Defer the OAS Pension: The budget fundamentals, the financial market environment in North papers state that Canadians are living longer and America will continue to be driven more by psychology may prefer to work longer and as a result, the than fundamentals on a day to day basis. In the longer government believes that the OAS program should term however, fundamentals – corporate earnings, reflect this new reality and provide the option for dividends paid and P/E multiples - do count. The individuals to work longer, defer OAS and receive market crash of 2008 remains very much in the minds of higher retirement benefits similar to CPP. many investors including many professional money managers. The fear of being caught in a falling market, or Proactive Enrolment for OAS and GIS Benefits: In the desire to profit from market declines by shorting, has the 2012 budget, the government announced that it become a central element in many investment strategies. would be putting in place a “proactive enrolment This leads to wide swings in day-to-day markets, regime” that would eliminate the need for many (continued on page 6) seniors to apply for OAS/GIS. This will be done in a phased-in approach from 2013 to 2015. Although the 2012 Budget proposal effectively reduces an individual’s potential retirement income by 2 years, it has also provided Canadians with more options when it comes to retirement income planning. Understanding your retirement income sources and options is paramount . A Northland Wealth Plan provides you with not only a thorough understanding of your retirement income sources, but also insight to strategies to maximize that income. 5
- 6. Issue: Spring 2012 The Artisan (Continued) exaggerated by computer driven trading, even when there has been no new Brush Strokes fundamental news. If there is real Painting the negative news, such as problems in Perfect Garden Europe, market moves can be even more In Canada, our springs are violent. While these market fluctuations not easy for starting gardens. are unnerving for investors they do Mother Nature seems to be a present an opportunity to acquire good bit ahead of schedule this quality stocks at lower prices. The focus year, but gardeners want to of investors in this type of environment be careful not to jump the should continue to be on bottom line gun per se since we are still a The Tangled Garden cash flow and not capital gains. While few weeks away from the J.E.H. MacDonald, The Group of Seven capital gains are to be welcomed, Victoria Day long weekend, which is the traditional barometer to investing in securities that pay little or no start planting. However, many are inspired by the signs of spring dividends as a dominant part of an and want to get outside. So where do you start? Below is a great investment strategy to achieve capital list of tips from gardening professionals across Canada: gains, is too aggressive in a market place that has shown itself reluctant to reward Start With a Plan. Make a list of the things you want to accomplish risk takers. As your investment manager, with your garden: Do you want to do a complete renovation? Northland Wealth will continue to strive Create some space for your kids? Design a place to entertain? Consider these goals before you start any planting. to increase bottom line portfolio cash flow, by using high quality, financially Be Prepared. Many people begin to think about their gardening sound, dividend paying corporate tools and other garden necessities on the day they want to begin. securities as core investments. We also Use the days leading up to gardening season effectively by ensuring continue to research and acquire for all your tools are in good order and working properly. clients alternative asset classes that Start With A Clean Slate. After pruning, the rest of the yard can be demonstrate strong cash flows such as cleaned of debris that has accumulated over the winter. This private real estate investment trusts includes removing leaves that were spread out to protect gardens, (REITs) and mortgages not normally and burlap covers from shrubs and trees. available to individuals. These types of Go Slow. Now is the time to start sowing your seeds indoors. Find a investments work to stabilize and sunny window and let the plants warm up to the spring weather in improve portfolio returns. the comfort of your living room. These can be both vegetables and flowers and can stay indoors until the frost has completely gone. David Cockfield, MBA, CFA Only the Best Will Do. Prepare your soil with lots of organic matter, Managing Director & Portfolio Manager as most gardens’ success revolves around this preparation. Plants will actually take care of themselves; you just need to feed the soil. The Tangled Garden Add compost and triple mix, especially if the soil is poor to begin (Inset Top Right of Page) with, and let the soil support the plants. Mix and Match. Once plants are ready for the outdoors, make sure By: J.E.H. MacDonald each one has its needs matched to the environment. Shade-loving of The Group of Seven plants go in the shade; sun worshippers go in the sun. Watch out for aggressive plants- only choose ones that you know you can keep at bay. The Tangled Garden was painted Lessen the Workload. Choose native plants like Echinacea to round from sketches at MacDonald's home out your space. They reduce your water usage and lighten the in Thornhill. The luxurious greenery maintenance required. in the lower half of the painting pulls its spirit in the direction of an almost Patio Party. For those with condo patios or house decks, containers are essential. Buy good quality container soil and don’t use old jungle-like wilderness. The relative earth from last year (take it to a nearby park and spread it there). flatness of the pictorial space gives the Make sure your containers have drainage access and use a picture a strong feeling of profuseness slow release fertilizer, like a “once-in-a-season,” that you and rich colour, and a kind of sensual only have to apply at the beginning of spring. indulgence. (Continued on Page 7) 6
- 7. Issue: Spring 2012 The Artisan (Continued from Page 1) Income from investments held in non-registered of a registered plan (RSP or RIF) is considered fully accounts is taxed at different rates based on whether it taxable at the time of withdrawal, similar to the way comes from interest, dividends, or capital gains. your salary from your employer would be taxed, Interest income is taxable annually even if it hasn’t regardless of the original source of income (i.e. been paid out, such as with accrued interest. dividends and capital gains). TFSA’s offer the advantage of providing tax-free growth, meaning any Capital gains, or profits made from the sale of funds removed from a TFSA are not subject to any securities, are taxed at a 50% inclusion rate. This taxation. As a result, allocation of interest bearing means that only half of the amount gained is taxable. investments to registered accounts, and dividend Example: If you sell a share for $20 that cost you $12, paying securities to non-registered accounts, can you will have a capital gain of $8. Therefore, only $4 often provide for a higher after tax-return. of the capital gain is taxable. Dividends are payments made by a company to shareholders based on the proportion of the shares they hold. Dividends are taxable in the year in which they are declared and entitle shareholders to a tax credit on Canadian dividends, which effectively reduces the percentage of income tax payable. The inset chart – Taxation of $1.00 of Income by Source, outlines the effective difference between after- tax returns of the various sources of investment income. Values below have been calculated using approximate taxation rates as of July 15, 2011 at a base income tax rate of 46% on income. For the non-registered portion of an investor’s Taxation rates vary from province to province, yet the portfolio, dividends and capital gains are not the only message conveyed is consistent. The taxation of way to reduce taxation. Capital distributions, dividend and capital gain income from equity typically provided by specialized alternative investments is in large part advantageous to that investment solutions, can also prove to be effective in provided from interest bearing investments. maximizing after-tax returns by means of tax In addition, when looking from a pure taxation deferral. standpoint, one must also take into consideration the Although you never want the tax tail to wag the allocation of investment funds between registered investment dog, investors should always be focused and non-registered accounts. Registered plans such on the long-term after-tax return as it will have the as RSP’s and RIF’s, as well as Tax-Free Savings greatest impact on their portfolios. To learn more Accounts (TFSA’s), offer tax-deferred and tax- about how the various taxation options are sheltered growth respectively. Any income taken out applicable to your portfolio, please give us a call. (Continued from Page 6) Behave Yourself. Or rather, pick plants that behave themselves. Aggressive plants can create more work than you have time for. Ornamental grasses, for example, are big right now: the travellers, which move mostly by root through the garden, are very invasive, yet the clumpers tend to stay in their place and won’t take over your garden. Choose the latter. Stay Away from Chemicals. An easy way to prevent weeds from growing is to overseed your lawn, with fresh quality grass seed. The quality of the grass seed in the bag determines the pedigree of your lawn tomorrow. Buy quality grass seed and you won’t regret it. Keep Weeds at Bay. A low maintenance (and natural) way to reduce weeds in your garden is to add finely ground mulch about 5 cm thick. This insulates the soil so that evaporation doesn’t take place as fast. Sun can’t reach down there, so the weeds won’t push through, eliminating the majority of your weeding problems within the first year. 7
- 8. Issue: Spring 2012 The Artisan Planning Files: 2. Joint Ownership Pro – Assets held jointly with right of survivorship Effectively Reducing Your will pass outside your estate Con – joint assets will be subject to legal (divorce) Probatable Estate and creditor claims of the joint owner(s) To probate or not to probate; that is the question. The most common mistake uncovered through the Estate 3. Giving it Away Today Planning process revolves around a treasured Pro – Assets not held in your name are therefore not Canadian pastime of trying to avoid probate taxes. included in your estate Although plans are made with good intentions, the end Con – Gifting assets could result in taxation due to result is often more detrimental to beneficiaries than if capital gains and may leave recipients paying more nothing was done at all. So what is the true than what is saved in probate fees motivation? Probate taxes range from one province to another. For the most part, residents of Ontario, 4. Establish Multiple Wills British Columbia and Nova Scotia have the greatest Pro – In some provinces, a supplemental Will can motivation to reduce probate taxes. Residents of be created for privately held companies which may Alberta, Quebec, Newfoundland and the Territories not be subject to probate really do not have much to be concerned about as their Con – If not created properly, the supplemental Will rates are rather insignificant in the big picture. So it is could revoke the primary Will safe to say the first step in reducing the need for probate is to determine what the cost savings 5. Establish Trust potentially are. As with every decision, there are pros and cons to be considered, and with the case of Pro – An Alter-Ego Trust or Joint Partners Trust are probate, it is often which choice is the lesser evil. not subject to Probate on the death of the primary beneficiary. So what exactly is probate? Probate is a legal process Con – Increased professional fees over time may by which the executor is confirmed and the will is exceed the cost of probate validated by the court. Effectively this protects both the beneficiaries and executor by having a record of Developing an effective and efficient Estate Plan is Probate. often not as simple as it seems and requires professional 5 General Strategies to Reduce Probate help. For that reason, an Estate plan is a key component of the Northland Wealth Planning process. 1. Designate Beneficiaries For more information on Estate Planning please Pro – Assets with designated beneficiaries are not contact our office. included in the probateable estate Jeff Sproul, PFP, BBA Con – inequalities in estate distribution amongst Vice President, Wealth Management beneficiaries will arise unless properly addressed Adventure Capitalist: The Ultimate Road Trip by Jim Rogers The best-selling author of The Investment Biker describes his three-year drive around the world with his fiancée Paige Parker, combining tales of his adventures in 116 countries with an insightful analysis of the global economy and the political, social, and cultural situation in various regions of the world. The Art of Giving by Charles Bronfman and Jeffrey Solomon The Art of Giving: Where the Soul Meets a Business Plan is a must-read book for aspiring philanthropists, wealth managers, non-profit professionals, and anyone who simply wants to make his or her philanthropic effort the most meaningful and impactful that it can be. 175 Bloor Street East, Suite 807, South Tower Toronto, Ontario M4W 3R8 (416) 360-3423 www.northlandwealth.com 8