Artisan spring 2013

THE ARTISAN
Issue: Spring 2013 The Artisan

Issue: Spring 2013 Quarterly Newsletter by Northland Wealth Management

The Markets: 2013 Federal Budget Special Report:
Update & Addressing “loopholes” in the
Outlook Canadian Tax System Page 4

Oh Canada! 1 Oh Canada!
… an island of relative calm in the
deleveraging western world…
While in past issues of The Artisan we have focused more on the
problems facing the world generated by the Great Deleveraging,
What’s New: this edition will deal in more detail with specific issues facing
Origins & Canada. However, it is important to first provide a brief review
Understanding of recent events outside of Canada.
A Few Points of Interest - In Europe the lack of a central authority to control the banking
Alternatives to traditional bonds
2 system became painfully apparent with the banking crisis in
Cyprus. While Cyprus constitutes less than 1% of the EU
economy, a plan to tax bank deposits sent tremors through the
Brush Strokes: whole of Europe. In Italy a recent vote to elect a new
Keeping Track government has created a political impasse, with anti-austerity
candidates receiving strong support and the austerity program
begun by the previous government now in doubt.
Money is only a tool. It will take you
6 In the U.S., there has been better progress as some spending cuts
wherever you wish, but it will not
replace you as the driver – Ayn Rand and tax increases have been achieved. Continued Federal
Reserve stimulation efforts have allowed employment and
housing numbers to continue improving. However, political in-
Painters Palette: fighting continues and there is as of yet no concrete plan to reduce
Investing in Real the large and growing federal deficit. (continued on page 2)
Property
It’s tangible, it’s solid, it’s
beautiful. It’s artistic, from my
7 Northland Insights:
standpoint, and I just love real Spring 2013 Commentary
estate. – Donald trump You may have noticed since the launch of our
firm that we have not only emphasized the
Planning Files: financial side, but also the intellectual, social and
Protecting Your human aspects of a family’s wealth -all of these
areas are of importance to the success and well-being of a family.
Assets
One such organization which shares this understanding is the
Are Your Valuables Protected Canadian Association of Family Enterprise (CAFE). This national
Against Potential Loss?
7 not-for-profit organization was founded in 1983 with the mandate to
promote the well-being, understanding and success of families in
business.
To demonstrate our commitment to Canadian families, Northland
Wealth Management is pleased to have become one of the initial
(Continued on page 3)

1


(Continued)
In Canada the appreciation that we are in a once-in-
a-lifetime economic restructuring similar to the
Great Depression is slowly taking hold. It is not yet
accepted that, like the Great Depression, this
restructuring will likely last for another three to five
years. The Federal Government, recognizing that
much of the Western world has had real estate
What’s New: markets drop sharply, has tightened mortgage
qualification requirements. The purchase of new
Origins & housing remains the most significant source of new
debt. Given that Canada remains one of the few
Understanding areas in the Western World where real estate values
Recently Mark Carney, the Governor of the Bank of have not fallen, some caution is warranted. An
Canada, stated that due to unsettled economic upward move in mortgage rates to the typical levels
conditions around the world, Canadian interest rates
are unlikely to start rising until around the middle of
of 6% experienced in the 1990’s would be a major
2014. burden on today’s young new home buyers. If one
wants to imagine a truly frightening situation, think
In addition, the economic forecast for Canada is not as
of the 15% plus mortgage rates of the early 1980’s. It
rosy as predicted last October, when the Central Bank
(of Canada) was anticipating an upturn in 2013. As a should be remembered that the very low interest
result, the revised forecast for our economy is for it to rates now in place are government policy generated
expand at a rate of 2 percent, down significantly from and rather artificial. At some point in the future
the 2.3 percent predicted a few months ago. these rates will move higher. So far real estate values
What does this mean for investments? For those who have been stable and prospects are for values to drift
require an income from their portfolio, the decline in sideways or slightly decline. Therefore, Canada
interest rates and bond yields has made it challenging should avoid the very negative economic impact of a
to replace the levels that we enjoyed only a few years real estate price collapse as experienced by the U.S.
ago.
As a resource producing nation, Canada has always
As higher coupon bonds come to maturity, given the been vulnerable to international commodities market
low interest rate environment, high net worth investors
have begun to look at alternative avenues to generate
fluctuations. With the growth of international
reliable income. At Northland Wealth we have markets and particularly the rise of China, the
identified viable solutions to address our clients’ positives have outweighed the negatives over time
requirements. (continued on page 3)

Some examples of alternatives that we are utilizing in
our clients’ portfolios (where appropriate) are:
o Actively managed bonds funds
o Dividend paying common stocks
o Preferred stocks
o Convertible bonds and debentures
o REIT’s – Real Estate Investment Trusts
In general these alternatives are likely to generate
higher yields in the current low interest rate
environment. We are diligent in ensuring a balance of
3) quality versus the increased yield. When we next meet
with you, we will be pleased to elaborate further on
this area. Investors in search of yield are now having to consider
Ian Kerr, NEBSS alternatives to traditional government and corporate bonds.
Managing Director & Portfolio Manager

2


(Continued)
and as a result Canada has survived the soft wood,
lead, zinc and aluminum price declines. Recently,
however, the energy sector, a long term provider of
growth, has run into problems. First it was natural
gas with new shale gas production drawing down
prices, and then demand from the U.S. Now oil is
experiencing price and demand pressures. The
U.S. for the first time in decades has experienced
rising oil production both from shale oil and the
Bakken oil discoveries in North Dakota. To add to
Canada’s problems is a major new pipeline - the
Keystone Project - designed to carry Canadian oil
sands production to the U.S. Gulf market, has
been delayed by environmental concerns and even Continued from Page 1
if approved soon it will not be operational for corporate sponsors of CAFE. We look forward to
several more years. The price for heavy Alberta working with this highly regarded association in
crude is $25 to $30 less than the basic benchmark order to assist in its growth of membership and
for the North American crude oil prices. While services provided to families across Canada.
various pipeline proposals are being made to gain
access to eastern Canadian markets and ultimately
the Atlantic coast (and also the Pacific Coast) the
timeline is still one of years. Shipping oil by railcar
is expanding rapidly and should provide some
relief, but cannot replace the volumes needed to
return Alberta oil prices to past profitable levels.
This situation has already caused, and will
(continued on page 4)

Arthur Salzer participated on a panel discussion
entitled The Lure of Investing in Real Assets and
Direct Investing for Family Offices which was part of
the Opal Canadian Family Office and Wealth
Management Forum held in Toronto in January
of this year.

In upcoming editions of The Artisan we will
periodically highlight our firm’s involvement with
CAFE and share the professional insights that we
Important Notice glean with you. Education and communication are
key elements of the wealth management process.
2012 Income tax return filing Therefore, Northland Wealth will begin to produce
“white papers” which provide in-depth insight on a
deadline. Personal Income Taxes range of topics from ‘investing in real estate’ to
have to be filed on or before ‘ending conflicts in the investment advisory
business’. We hope you will enjoy them.
Tuesday April 30th, 2013.
3


(Continued)
continue to cause, a slow-down in the development of 2013 Federal Budget
Canadian oil resources. This in turn will mean slower
growth for Canada as a whole, as the energy sector has Special Report:
been an engine of growth for Canada for decades. In the Addressing “loopholes” in
longer term low energy prices in North America, plus
the ability to export to the developing world, will be an
the Canadian tax system
economic plus for Canada and the U.S. In the short Initial reactions to the 2013 Federal Budget were
term however Canada will suffer. that it was rather lack lustre. However, after a
deeper look, and more specifically from a wealth
The recent Federal Budget offered a strong contrast with planning perspective, it was anything but lack
what is happening south of the border. While some tax lustre. Typically from a personal finance
standpoint, most Canadians generally have seen
the Federal Budget as positive, providing us with a
variety of opportunities to improve our financial
future. This holds true to a certain degree in this
budget.
Constructive changes from the budget are
highlighted by:
o Increasing the small business, life-time capital
gains exemption by $50,000 to $800,000 as
well as indexing it to inflation going forward.
o The introduction of a First Time Donor’s
Super Credit to encourage Canadians to
become philanthropic. Providing qualified
individuals with an additional 25% non-
refundable tax credit on up to $1,000 of
donations.
advantages for small business were eliminated, no However, a large number of the changes are quite
significant tax increases were proposed, and expenditures the contrary. For the most part, the Minister of
are under control. The Federal deficit should be Finance has used the 2013 Federal Budget as an
eliminated by 2016. In contrast the U.S. has only taken opportunity to tidy up some loose ends and play
catch up, by closing a number of tax loopholes.
some small steps to increase taxes and cut expenditures.
Unfortunately the psychology of what is happening in the Changes proposed in this budget that could
U.S. has had and will have an impact on Canada. potentially affect high net worth families and
individuals are summarized below:
Further political bloodletting is likely to come in the U.S.
o Effectively eliminating the advantage of equity
While Canada, despite its problems with energy prices, monetization arrangements (which was used to
seems an island of relative calm in the deleveraging defer capital gains where individuals had large
western world, our equity markets have significantly holdings in one security) by now requiring
under-performed those south of the border. Why has this these transactions to be considered a deemed
happened? The first reason, that is obvious, is the disposition for taxation purposes.
makeup of the TSX, which has significant commodity o Two complex insurance strategies have been
targeted (leveraged insured annuities and10/8
content. With commodity companies facing profit
arrangements) in which the government is
growth headwinds, stock prices have languished with the closing the borrowing loopholes that resulted
TSX, as at the end of March 2013, with negative return in “unintended tax benefits”.
for the last two years. However earnings plus dividend o Curtailing the ability of investors to convert
payouts have risen in that period, but investors, fully taxable ordinary income into tax-
perceiving greater future risk, are demanding lower price preferred capital gains. This will affect funds
earnings multiples as compensation. The out- that utilized derivative contracts to convert
highly taxable distributions into distributions of
performance of U.S. equity markets has also attracted the (continued on page 5)
(continued on page 5) o
4


(Continued)
capital gain seekers in the Canadian investment
community. Canadian buying of U.S. investments
means selling Canadian investments thus putting
pressure on Canadian equity prices. The other
question that should be asked is, why are U.S. equity
markets, particularly recently, out-performing and
breaking historical highs and also out-performing
virtually all equity markets in the world? The 2013 Budget Special Report - Continued from Page 4
answer can be found in the U.S. Federal Reserve capital gains.
stimulation program. The Federal Reserve, by o Proposed adjustments to Dividend Tax Credits for
pumping liquidity into the banking system, is small business owners, effectively eliminating or
creating a situation where some of that liquidity will reducing the advantages of drawing income from
spill over into equity markets. So despite major dividends versus salary.
o A suggestion that the Finance Minister is taking a
unresolved fiscal and monetary problems, plus a
closer look at the taxation of Testamentary Trusts.
dysfunctional political situation, U.S. equity markets The government announced that it is “concerned
continue to forge ahead. Needless to say the risks of with potential growth in the tax-motivated use of
a market correction in the U.S. are high and rising. testamentary trusts and the associated impact on the
tax base”.
Our investment strategy remains the same. o Safety Deposit Boxes are no longer considered as
Recognizing that while some progress is being made “carrying costs” for investors and as a result can no
in the western world’s deleveraging process, progress longer be deducted from investment income.
is minimal and significant risks, particularly in o Phasing out of tax credits for investments in labour-
Europe, remain. The corporate sector in North sponsored funds, which in the most part have not
America remains in excellent financial health and been very good investments for Canadians.
should be the focus of investment. Equity markets o Introduction of the Stop International Tax Evasion
Program which rewards individuals who provide
will remain volatile and capital gains elusive. Cash information that assists in the collection of
flow from predictable sources, both dividends and outstanding taxes due to “major international tax
interest, should be emphasized as well as non-compliance”
preservation of capital. The market environment we o Revisions to Form 1135 which requires Canadians
are experiencing is unlikely to change any time soon. to provide more detailed information on foreign
It is not an environment that that will reward foolish property costing over $100,000 at any given time in
risk taking. Against this backdrop, we continue to the year. This includes foreign bank accounts,
foreign non-personal real estate and foreign stocks
see opportunities in select areas of the real estate, held in non-registered Canadian brokerage
credit and equity markets. accounts.
David Cockfield, MBA, CFA Investors and advisors will be scrambling to attempt to
Managing Director & Portfolio Manager find ways to reverse the effects these new proposals
may have on previously implemented strategies.
At Northland we assist our clients by providing insight
into the advantages of various strategies, but also make
sure they are aware of the potential ramifications if
government makes policy changes that would negate
those advantages. As the old saying goes “if it looks
too good to be true, if often is” or maybe now we can
add “at some point it will be”.
We would be pleased to review with you the impact
that these proposed changes may have on your current
strategies.

5


Brush Strokes:
Keeping Track
So where does all our money go?
As with any aspect of life,
knowledge is key. To the same
extent, technology provides us with
the tools to either assist with
providing that knowledge, or
putting it to work. When running
a business, understanding cash Northern Lights
flow is an important component of Tom Thomson, The Group of Seven
success. The same should hold true with household and personal
Market Insights with David Cockfield expenses.
Northland Wealth is delighted to introduce Keeping track of your own data can be your largest asset. Maintaining
a new component to our website. Market information on your spending habits is worth its weight in gold, as is
Insights with David Cockfield is a periodic the creation of an annual budget.
video blog of Northland Wealth’s thoughts
on various issues facing the markets. In Displaying your spending habits, in terms of where, when, and what
addition, David also highlights some of the you purchase, enables you to not only analyze and evaluate where
solutions being utilized in Northland your money is being spent, but also to determine whether you are
portfolios to protect our clients’ wealth using your cash flow to its full potential and within your budget limits.
and/or benefit from opportunities that You will finally be able to answer the most trivial question: “Where
arise. Please visit our website to view our did my money go?”
inaugural video blog. Online Tools
The emergence of technology has brought the development of many
online tools that pull data from your financial institution and present it
in a rich and meaningful way. For example, imagine depicting with
precise accuracy how much you spend on gas as a percentage of your
monthly expenditures? You are able to see how much you spend
dining out versus eating at home, or how much you allocate to your
favourite pets. This is not to suggest how to allocate or judge your
personal spending, but rather provide a tool to help you better
understand your finances.
The most prominent service today is Mint.com which has proven to be
very useful for many individuals. However, when choosing a provider
Northern Lights via the internet, it is always important to acknowledge safety and
(Inset Top Right of Page) security. You are therefore encouraged to review their terms of service
By: Tom Thomson and safety measures prior to activation.
of The Group of Seven Multi-Generational Education
Preparing a budget that takes account of our financial resources, and
understanding our cash flow and spending habits will serve us well
Do you see the northern lights? Yes Tom, over time. The sooner children learn this, the better and it can start at
I said, they're very brilliant tonight. And an early age. This will assist in detecting fraudulent transactions, help
he wound his hands, and out he'd go, and develop positive habits, and ensure your children use their money
stand. And I kept on a roaring good fire, responsibly. Once mastered, one can then move on to understanding
and Tom'd come in, warm his hands the purpose of investing and the goals you wish to achieve for yourself
again, five below zero, and out he'd go. and your family, be it retirement, producing income for cash flow
And just gaze at them. Finally about purposes, or a blend of income and capital gains.
eleven thirty it would be, he said, I
believe I can put that on canvas. Now, Members of our team would be delighted to assist you in educating
that "Northern Lights" was painted partly members of your family on financial responsibility. A little knowledge
by lamp light, and walking out and can go a long way. It is never too early to start, especially with the
lookin' at it. How he did it, no one knows younger generations.
but Tom Thomson." Victor Kuntzevitsky, Associate

6


The Painters’ Palette:
Investing in Real Property
The following is a portion of our upcoming “white
paper” that will be released shortly on our website
entitled Investing in Real Property which will discuss
this asset class in fuller detail.
The definition of real estate is "land and the buildings
on it, along with its natural resources such as crops,
minerals, or water;” which form part of an asset class estate, it is more difficult for investors to make
known as “real assets” that includes things such as emotionally driven buy and sell decisions such as they
commodities, infrastructure, bullion and natural do with stocks. As a result, this asset class exhibits
resources. “Real assets” tend to be grouped together greater stability and therefore is less correlated to the
because they are long-term and physical in nature. remainder of the portfolio.

During the past couple of years, Canadians have Real estate also acts as an inflation hedge, like other
become familiar with investing in Real Estate real assets such as commodities. Stocks may provide
Investment Trusts (REITs) that trade on the public some inflation protection if they can pass along
markets like a stock, as retail investors have bought increased costs to their consumers. Bonds, on the other
these REITs in a search for yield. These public REITs hand are not an inflation hedge, as their value declines
may be good options for retail investors who do not when inflation or interest rates increase. Having real
have the capital to access private partnerships, but estate in a portfolio will offset the effects of inflation
investment in private real estate may provide superior over time, preserving purchasing power.
risk-adjusted returns and opportunities that are not Real estate is a management intensive business that
available in the public marketplace. requires a specific skill set in sourcing, buying,
Historically, pension funds along with insurance financing and operating properties. Due to this unique
companies and foundations, were the first to utilize nature, it is critical when evaluating investments in this
private real estate investments, as they provided an sector, that a great amount of dedication be applied to
inflation hedge and diversification to their portfolios. the due diligence process, in order to evaluate the
More recently, wealthy families came to realize that manager’s abilities and skills to execute their plan.
real estate should form part of the core of their overall To learn more on how real estate should play a role in
investable portfolio as well. your investment portfolio, we would welcome the
One of the favourable attributes of real estate is that it opportunity to discuss this option, as well as others, in
does not fluctuate based upon the stock market and further detail.
therefore provides a diversifying effect on a portfolio. Arthur C. Salzer, CIM, CFA
Because of the illiquidity (long-term nature) of real CEO & Chief Investment Officer

Planning Files:
Are Your Valuables Protected Against
Potential Loss?
At Northland we believe that the Wealth Planning Process should be a
holistic approach. For that reason, we are continually looking for new
areas where we can add value. As part of our analysis of a family’s
financial well-being we typically perform an insurance review. For most
firms this is focused on life and disability insurance. However, over a
lifetime we will accumulate a variety of assets, some of which carry
significant value. Therefore, as part of our insurance review we are now
including analysis and recommendations on home, auto, liability and It is a bad plan that admits of no
personal property insurance. (Continued on page 8) modification - Publilious Syrus

7


To effectively provide the insight our clients require, therefore on-going management with a focus on service
we seek out companies that shares the same values as should be the hallmark of your insurance professional.
we do here at Northland and specialize in serving As with any industry, there are varying degrees of
affluent clients with their insurance needs. service available from call centers to Private Client
Services. At Northland Wealth we are utilizing the
Most would argue that obtaining insurance coverage is services of companies that have access to all the proven
a simple task that can be completed on-line or over the insurance carriers who specialize in insuring the
telephone. This does hold true, however the question affluent client and they will source the best carrier and
becomes are you getting the coverage that you actually negotiate powerfully on your behalf.
require. Often times the policy that you receive
through this process comes with a number of caveats “Often the sensitive needs of High Net Worth
written in the small print of the policy later sent to you individuals and families are not met. Multiple
in the mail. These documents often find their way into exposures exist such as having several homes and autos
one’s personal files without a full review. Fast (perhaps even internationally), fine art collections and a
forward to when you need to make a claim and diverse array of personal exposures” says Lyndsay
surprisingly it is much more difficult to receive what MacDonald, Account Executive at Jones Brown
you thought you had been paying for all those years. Private Client Services. With a multitude of insurable
risks, a family’s best interests are met when they utilize
Now if you put into place the same due diligence the expertise and competence of a single broker which
processes used to select investments, your insurance creates a customized, comprehensive insurance
planning would take on a much different look. A full program that will address all of the family’s insurance
in-depth analysis of your asset base by insurance needs.
specialists with experience on both the claims and
company sides of the business would seem much more Ensuring our clients are provided solutions that take
prudent. By quantifying in advance the financial loss into consideration all aspects of their financial life is the
potential you face as well as fully documenting the loss foundation of our Wealth Planning Process. If you
prevention measures in place, you can avoid the often wish to investigate how a comprehensive Wealth Plan
uncomfortable experience of justifying your loss at can better serve you, please contact our office.
time of claim.

Similar to an investment portfolio, your insurance Jeff Sproul, PFP, BBA
portfolio requires regular review with an unbiased Vice President, Wealth Management
perspective. Families’ needs change over time,

The Cycle of the Gift – Family Wealth and Wisdom by Hughes, Massenzio, Keith
The authors have given the reader much to consider–the spirit of giving, the desired effect
when making gifts, and the function of the gift over the form. Like Family Wealth, this book
puts a spotlight on the most important questions for family members to contemplate when
making gifts and offers the potential for completely different outcomes from the experience.
The Stewardship of Wealth by Gregory Curtis
Building wealth is hard to do, but maintaining that wealth across generations is even more
challenging. Curtis outlines the best practices for preserving and growing wealth. The book
details exactly how to build a lasting financial legacy in the face of taxes, inflation,
investment costs, and the conflicts of interest that are endemic to the financial advisory
business.

8965 Woodbine Avenue
Markham, Ontario L3R 0J9
(888) 760-6596 (NLWM)
www.northlandwealth.com

8

Artisan spring 2013

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