Managed Money Reporter Newsletter — Issue 158, April 2000


Editors: Carl Spiess & Allan McGlade


Featured Articles



Budget 2000 - How it affects YOU!!!

Budget Measures Affecting Individuals

The Federal Budget, released on February 28th, 2000 by Federal Finance Minister Paul Martin, contained a number of measures affecting individual taxpayers. Several changes have been implemented, most of which will benefit our clients. Please note that individuals should contact their own tax advisors to determine the effects of this budget on their personal situations.

Financial Market Impact

Mr. Martin's millennium budget has positive implications for equity investors in light of three fundamental policy changes - the reduction in capital gains taxation, the decline in corporate taxation and the increase in the foreign content of RRSPs and RRIFs. Policy changes aimed at creating a more competitive economy should be good news for the currency. The re-introduction of full indexation may be interpreted as an undertaking of future fiscal discipline. Fixed-Income markets may be disappointed by the limited repayment of debt.

Registered Plans and Foreign Content

As expected, the limits for foreign content have been expanded. This year, effective immediately, foreign content room for registered plans (RRSPs, RPPs) has been increased from 20% maximum to 25% maximum. For 2001 and beyond the limit will be raised to 30%.

This recent increase also positively impacts holders of Labour Sponsored Investment Funds (LSIFs) and qualifying small business Canadian Controlled Private Corporations (CCPC's) who prior to the change had additional foreign content room of three times the book value of their LSIF/CCPC investment to a maximum of 40% of their portfolio. With the budget increases the same rules apply only to a maximum of 45% for the year 2000 and increasing to 50% thereafter.

Unfortunately contribution limits remain unchanged.

Registered Education Savings Plans are unaffected, as they have no limitations in regards to their foreign content allocations.

This is a good opportunity to have a look at your portfolio and see if you can take advantage of this recent change. Remember that you can switch within a fund family at no charge or you can redeem 10% of most mutual funds annually with no deferred sales charges (DSC's). It may be to your advantage to use this option to increase your personal foreign content.

Federal Tax Brackets

The government will be reducing the effective tax rate for the middle income tax bracket. Effective July 1, 2000 the middle tax rate will drop from 26% to 24%. As a result, the rate in effect for the 2000 tax year will be 25%.

New Federal Tax Brackets (2000)

INCOME LEVEL

TAX RATE

Up to $30,003 17%
$30,004 to $60,008 25%
$60,009 and over 29%

This will be a savings of approximately $300 for 2001 and approximately $600 a year thereafter for someone earning $60,000.

Capital Gains

Capital Gains realized after February 27, 2000 will be subject to an income inclusion rate of 66 2/3% (a reduction from 75% inclusion rate that applies for all previous gains). For an individual in the highest marginal tax bracket, this reduction will result in a tax savings of approximately $50 on $1000 of capital gains.

This reduction will have an impact on tax reporting for the year 2000, as two separate capital gain and loss reports will be required for each individual. This first reporting period will include transactions for January 1, 2000 to February 27, 2000 and the second will include transactions from February 28 2000 to December 31, 2000. An individual's actual inclusion rate for 2000 will depend upon whether the individual has realized net gains or net losses in one or both periods, or a net gain in one period and a net loss in the other.

Capital Gain Rollover for Investment in Small Business

The budget proposes to permit a rollover of capital gains on the disposition of a small business investment to allow tax-deferred access to that capital for the purposes of making other small business investments. This measure will apply to eligible small business investments disposed of after February 27, 2000. The budget contains specific definitions of what qualifies as an Eligible Small Business Investment, an Eligible Investor, and Eligible Gains. This is a complex area and should be discussed in detail with your tax advisor.

Employee Stock Options

Currently, when an employee exercises a stock option, the difference between the fair market value of the stock on the date of the exercise and the exercise price is included in the individual's income as employment income. Generally, a stock option deduction is allowed, resulting in the benefit being taxed at the same rate as a capital gain.

The budget proposes to allow employees to defer the income inclusion from exercising publicly listed shares until the disposition of the shares, subject to a complex annual $100,000 limit. This measure applies to options exercised after February 27, 2000, irrespective of when the option was granted or when it became vested. The options are eligible for the new treatment if the share is an ordinary common share of a class of shares traded on a prescribed Canadian or foreign stock exchange, and the total of all amounts payable to acquire the shares is not less than the fair market value of the share at the time the option is granted. The deferral period will cease at the time the underlying shares are sold, or at the time the employee dies or becomes a non-resident - whichever comes first. Options granted by CCPCs (Canadian Controlled Private Corporations) are not affected by the proposed measure, as the taxable benefit is already generally not included in income until the year of disposition.

Other Changes

The basic personal exemption has been increased from $7,131 to $7,231 as of January 1, 2000. The age amount has been increased from $3,482 to $3,531 and the old age security claw-back income threshold has been increased from $53,215 to $53,960.

Currently the 5% surtax applies to incomes of approximately $65,000 and over. Effective July 1, 2000, the government intends to eliminate the 5% surtax on incomes up to $85,000. Therefore, for the year 2000 the 5% surtax will apply to an income level in excess of $74,242. Effective January 2001 the 5% surtax will be reduced to 4%, with a further intent to eliminate the surtax within the next five years.

The People Behind The Mutual Fund Reporter

In the September 1993 issue we introduced the people responsible for The Mutual Fund Reporter. Apart from a few additions and a few name changes, we are pleased to announce that our staff that was available to help you then are still happy to help you today with 5 out of 6 of the team members from 1993 still available to service all of your investment needs. Your investment team now consists of 11 members, 8 of which are fully licensed.

John Zufelt,
Director
Carl Spiess, MBA
Associate Director
Allan McGlade,CLU, CFP,
Estate and Insurance Planner
Sharon Calvert,
Investment Associate
Jane-Ann Crombeen,
Investment Associate
Nicole Keeler,
Investment Associate
Jennifer Hart,
Administrative Associate
Ron Pante,
Administrative Associate
Brenda Cordeiro,
Administrative Assistant
Brenda Petrunick,
Administrative Assistant
Nalini Singh,
Administrative Assistant

Fund News

Due to the C.I./ BPI merger we saw take place last year the following changes have been made: BPI American Small Companies has been renamed Signature American Small Companies Fund, and BPI Global Small Companies Fund has become Signature Global Small Companies Fund.

 



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F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

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