Managed Money Reporter Newsletter — Issue 262, March/April 2011


Editors: Carl Spiess & Allan McGlade


Featured Articles



Budget Watch

The 2011 federal budget will be tabled on March 22.

This year's budget is not expected to propose any major changes to the current tax regime for individual Canadians. We do not anticipate any tinkering with the various registered savings plans Canadians count on to save for retirement, post-secondary education, and other important financial goals. There has been some speculation however that the Guaranteed Income Supplement (GIS) for low-income seniors will be increased.

For more details on the items that might be tabled on budget day, we recommend reading the preview summary from KPMG.

On budget day, be sure to visit the Scotia Economics web page to access a comprehensive review of the federal government's economic outlook. Look for any provisions that will help Canada and Canadians stay competitive in the global economy.

In the meantime, you can access an update on Scotia Economics forecasts for interest rates and currency exchange rates until the end of 2012. The March 3 Economic Forecast published a very interesting outlook for the Canadian dollar to continue gaining strength against the U.S. dollar over the next 18-24 months.

We will provide an update on any relevant federal budget provisions in the next issue of Managed Money Reporter Newsletter.

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April is tax time!

The deadline for filing your 2010 tax return is Monday, May 2.

April is the cruelest month, said poet T.S. Eliot... perhaps because it reminds us how much personal income tax we pay. If you're an employee, you now have your T4 in hand that shows how much you earned last year, and how much income tax was deducted. Your mission in April is to use all legal means the government offers to reclaim some of that tax as a refund.

If your tax situation is complicated, it likely makes sense to use an accountant or a tax service to prepare your income tax returns. If you are able to do your own taxes, it can put you in touch with your current financial situation. That also makes April a good time to plan and budget. Here is a general formula for do-it-yourselfers.

Start early

The earlier you start, the more time you will have to explore deductions and credits—and to find the receipts that substantiate them.

Declare all of your income

Most of your income information will arrive on slips, like T4s for earnings, and T3s and T5s for investment income. Some other forms of income, such as rental income, require a discretionary declaration. Misstating income is considered a very serious offence by the tax authorities—so don't take that risk.

Claim all of your eligible deductions, credits and provisions

Every new provision you find can put money back in your pocket! So don't think that calculating the medical expense credit, splitting pension income, or transferring your child's unused education credits won't mean that much—or is too much trouble. Keep a $50 bill on your desk to remind you.

From an investment point of view, don't forget to declare any capital losses on non-registered investments you sold in 2010. Capital losses will reduce any capital gains tax payable in future years. Capital losses can also be carried back three years to offset capital gains previously claimed.

File on time

Late penalties and interest will erode your tax refund, so make sure you file well ahead of the deadline.

Use tax software

Tax software makes the whole process easier for do-it-yourselfers. A lot of information can carry over from year to year, and the programs do many of the complex calculations for you. Software programs can alert you to deductions and credits you may not have considered, and then let you file your return electronically (NETFILE) for convenience, and a faster refund if you qualify.

One of the popular tax packages in Canada, QuickTax, has been renamed TurboTax this year. Scotia customers are eligible for a [25%] discount on this year's boxed edition of TurboTax. Boxed editions are only available for Windows; an online version supports Mac. Another option is tax software called GenuTax, which charges a one-time fee and provides annual updates at no extra charge. It is only available for Windows. Check it out at genutax.ca. Note that the Spiess McGlade Team does not endorse any particular brand of tax software.

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Investing for tax-efficiency

There are many factors involved in choosing the right investment. Some of the most important are performance and track record, quality and consistency of management, risk profile and volatility, fees and fee structure. However, another important factor often overlooked is tax efficiency. After all, why choose a top performing investment if a big chunk of your return gets siphoned off as tax?

Registered plans help Canadian investors with tax efficiency, but one clear principle of our tax system is that investment-related tax must be paid at some point in time. Most often, income tax is paid on your earnings before investments are purchased which is the case with TFSAs, RESPs and non-registered investments. Only RRSPs allow your contributions to be deducted from income for tax purposes—but that tax must be paid when funds are withdrawn at the same rate as earnings. Hopefully, your income will be lower in the year(s) you withdraw.

Tax efficiencies for non-registered investing

Beyond registered plans, things get more complicated. Not only do investors pay tax on their earnings before investments are purchased, but they must also pay tax every year on the distributions from their investments—the interest and dividends. Capital gains are only taxable in the year investments are sold.

Non-registered investing brings into play another principle of the tax system: not all forms of investment income are treated equally. Interest income, for example, is taxed at the same rate as employment earnings. Dividends from Canadian corporations are eligible for the Dividend Tax Credit, which makes them more tax-efficient than interest. A capital gain is cut in half before it's added to income and taxed (in the year investments are sold), which makes this the most tax-efficient form of investment income.

What does this all mean? First of all, it's a good idea to hold all your interest-bearing investments such as bonds, GICs and money market funds inside your RRSP. Since all RRSP withdrawals will be taxed at the highest rate of earnings and interest anyway, why hold dividend and capital gains investments in that plan? Keep those investments in non-registered accounts where you can take advantage of their tax efficiency.

Second, consider tax-efficient investments for your non-registered accounts. Some mutual funds are deliberately managed in part for tax efficiency by keeping their annual distributions to a minimum. These tend to be "buy-and-hold" type funds, because frequent trading and portfolio turnover are what make a fund tax inefficient. Many mutual fund research sites rate the tax efficiency of funds; for example, Morningstar.ca assigns a ranking of one to five.

Corporate class funds

Another big development in the tax efficiency of non-registered investments has come to market in the last decade. These are "corporate class" funds—groups of mutual fund clones that are held in a corporate structure instead of the traditional mutual fund trust. The arrangement gives investors two big benefits.

  1. The ability to switch non-registered investments (within the corporate class group) without triggering capital gains tax. You can rebalance, reallocate assets and/or make tactical shifts while deferring tax until you actually sell investments and withdraw money from corporate class.
  2. The ability of the investment manager to create tax efficiencies within the corporate class group by using corporate accounting rules. This may include reducing or eliminating annual distributions, or distributing only tax-efficient dividends and capital gain.

Corporate class funds tend to have slightly higher fees, but their tax efficiencies could still leave you ahead of the game. It's especially beneficial to choose the corporate class versions of global dividend or global equity funds, because distributions of foreign dividends do not qualify for the Canadian dividend tax credit and will be taxed at the rate of interest income.

As you can see, there's a lot to think about. The Spiess McGlade Team is always conscious of the tax efficiency of your investments, although it is one of many factors we consider. For more information about tax efficient investing, visit our online Learning Centre at the following link.

If you have any questions about the tax efficiency of your holdings, please call (416-863-RRSP) or email us and we will be happy to let you know.

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Industry roundup

PIMCO launches eight Canadian funds

PIMCO is one of the world's largest fixed income managers, with deep experience in the global bond market. The Canadian office of PIMCO opened in 2004 with a focus on Canadian institutional investors. In January 2011, the company launched a family of eight funds for retail investors.

  • PIMCO Canadian Short Term Bond Fund
  • PIMCO Canadian Total Return Bond Fund
  • PIMCO Canadian Long Term Bond Fund
  • PIMCO Canadian Real Return Bond Fund
  • PIMCO Monthly Income Fund (Canada)
  • PIMCO Global Advantage Strategy Bond Fund (Canada)
  • PIMCO Global Balanced Fund (Canada)
  • PIMCO EqS Pathfinder Fund (Canada)

Visit PIMCO's Canadian web site at:

ScotiaMcLeod 2011 recommended funds list

ScotiaMcLeod has published its 2011 list of recommended funds. As you might expect, there is some crossover between ScotiaMcLeod's list and the Spiess McGlade Team list. However, the ScotiaMcLeod list is much larger and broader-based. The Spiess McGlade Team list is more concentrated and a bit more conservative due to the number of group pension clients we have.

It's well worth a look! To see this year's ScotiaMcLeod recommended list, go to:

To see the Spiess McGlade Team's recommended list, go to:

ScotiaMcLeod Investment Portfolio Quarterly

While we are discussing ScotiaMcLeod's renowned equity research, it is worth mentioning that the Winter 2011 issue of Invetor Portfolio Quarterly is now available:

PH&N High-Yield Bond Fund capped

The well-known and successful Philips, Hager & North High Yield Bond Fund was capped to new investors last November after an announcement in September. Over 10 years, the fund had amassed over $2 billion in assets. Management said the cap would preserve future capacity for current investors and help maintain the integrity of PH&N's disciplined investment management approach.

The RBC High-Yield Bond Fund was launched at the same time for new investors, as RBC now owns PH&N. For more information, follow this link.

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Recommended Link of the Month

For those who want a more detailed set of tax tips as April approaches, the following link will take you to the Certified General Accountants of Ontario web site. Enjoy!

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Contact Us

T.  416.863.RRSP (7777)
     1.800.387.9273
F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

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