Managed Money Reporter Newsletter — Issue 272, January/February 2013


Editors: Carl Spiess & Allan McGlade


Featured Articles



Contribution time again

Carl Spiess

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA

The start of the year means that the RRSP deadline is coming up again - Friday March 1st to be exact. RRSP contribution limits have risen to $22,970 (less your pension adjustment if any) for 2012. Contribution room in Tax Free Savings Accounts (TFSAs) has increased to $5,500. RESP contributions of $2,500 attract a $500 education grant for children 17 or under. (See these special rules if your child(ren) is/are between the ages of 15 and 17.)

With all these different account choices, it can be challenging to know which account is the best for you. For higher income earners, we generally recommend the RRSP first, RESP second, then TFSAs if you are mortgage debt free. For younger investors and those in retirement, TFSAs have more appeal than RRSPs. Amazingly, at time of writing this two weeks into January, 1/3 of our clients with TFSAs have already topped up (or had us proactively) top up their TFSAs.

Making your contribution is easy. Most banks now allow you to contribute to your ScotiaMcLeod account as a bill payment. See how:

or use our handy form if you are mailing a cheque:

For what to invest in, please contact us or review our recommended list:

A quick review of the list confirms that the last year was good for investors, as ALL the funds on our recommended list have positive 1 and 3 year return numbers

For more investment ideas, look into our Recommended reading below or even easier, just contact us at 416-863-RRSP or spiessmcgladeteam@scotiawealth.com for an account review and specific recommendations for your accounts.

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Recommended reading

The looming "fiscal cliff" in the US was thankfully avoided (or at the very least postponed). We reviewed the reams of analysis that was written about the fiscal cliff and found this 4 page piece by the BlackRock division of Exchange Traded Fund (ETF) provider iShares to be the most concise, while still providing all of the salient points:

Our Investment Portfolio Quarterly is a complete 79 page newsletter that covers investment strategies using individual stocks, bonds, mutual funds, and ETFs:

For clients who like to focus a bit more closely on individual stock names and trading themes, Scotia Equity Research publishes this comprehensive 242 page investment guide:

For a quicker read, see our Portfolio Advisory Group analysts top 10 stock picks:

And also from our Portfolio Advisory Group, the December Monthly Review has a good summary of the markets in 2012:

For a really simple one page summary of where our analysts think things are going this year, see:

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The ScotiaMcLeod paperless contest - Win $5,000!

ScotiaMcLeod Paperless Contest

To encourage more of our clients to use Scotia OnLine and register to receive paperless statements, ScotiaMcLeod is running a contest where you can win one of six prizes of $5,000 each. You will automatically receive one entry for each account that you switch from paper statements and trade confirmations to paperless in the contest period (to June 30th). To thank the many clients who have already switched, if you registered to receive paperless statements and trade confirmations prior to January 7, 2013, you will automatically receive one entry into the contest. We recommend you continue to receive your Annual Trading Summary by mail.

If you currently do not have access to Scotia OnLine or cannot see your ScotiaMcLeod accounts on Scotia OnLine so you can switch to paperless, please contact us to request access.

More on Scotia OnLine and the paperless contest

Paperless record keeping

Contest details

General Information on Scotia OnLine

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Flow through shares

Are you looking for a major tax deduction? Are flow through shares right for you?

Flow through shares have been available to Canadian investors for many years. Historically, the government has always provided tax breaks to companies who engage in exploration activities. The government hopes to have thus spurred economic activity that then gets taxed down the road. Ned Goodman, of Dynamic funds, set up some of the first flow through partnerships in the 1980s and allowed companies to pass those tax deductions through to individual investors. The CMP and CDR resource flow throughs have posted impressive after tax returns over the years. Since those early days, the number of investment companies offering flow through shares has increased dramatically and we are able to offer many prospectus-based flow through limited partnerships to our clients.

As an individual investor, flow through shares are of course primarily attractive due to the tax deduction. Here is an overly simplified example:

For a $20,000 investment, you typically receive a full $20,000 income tax deduction and thus reduce taxes by say, $9,000 (individual tax rates will vary but we recommend only highest marginal tax rate investors consider flow throughs). Immediately the investment declines in value after issuing costs and the fact that the underlying resource issuers were paid a premium for their shares in order to relinquish their tax deductions. And there are management fees for the two year life of the investment. Let's be overly pessimistic and assume a 30% reduction in value to $14,000.

The flow through will typically be illiquid for 2 years and eventually rolls into a mutual fund run by the issuing company. At that point, the fund will likely have a very low cost base for tax purposes (let's assume $1,000 from income the limited partnership receives over the 2 years). The investment would still have a market value of $14,000 if the underlying resource stock prices had not moved in 2 years. So assuming a $1,000 cost base, a $13,000 capital gain would result when you sell for $14,000, with a $3,000 capital gain tax cost owing. So net cash realized 2 years later is the same $11,000 that was the after initial tax investment. The ROR after tax in this case is 0%, because the underlying resource stocks didn't change in value, and the benefit of the full income tax deduction was offset by the issuing costs plus the (lower) capital gains tax owing at the end. If however, the underlying resource stocks move up (or down) in the 2 year period, the after tax return can be magnified up (or down) significantly. We could also consider the opportunity to have that extra $9,000 invested over the time instead of giving it to the government right away, but let's leave that as a side benefit. Clear as mud? The documents linked below under "More on flow throughs" have more details and various return calculations.

From the rough example above, the big benefit on flow through shares is if you have unclaimed capital loss carry forwards. In that case the loss would offset the capital gain on the sale of the flow through, so even if there is no change in the resource sector, clients can see a tax benefit as there would not be tax owing upon the sale of the flow through proceeds. Please note that the proceeds of flow throughs purchased after March 22, 2011 are no longer eligible to be donated to charities without incurring capital gains tax. This was a significant benefit of flow throughs that was eliminated in the 2011 budget.

Individual flow through years wind up being like the years for good or bad wines. Virtually all the flow throughs issued in the year 2007 when resource prices had hit record highs, had major losses when redeemed in 2009. But investment vintages like 2005 or 2009 wound up showing great returns. (There are also single issuer flow throughs that typically roll over in 4 months, but have much higher risk since you are investing in just one company at a time, instead of a diversified portfolio of resource stocks.) Investing over a few years and a few issuers is a good way to smooth out those ups and downs.

Here are some after-tax rates of return on some of Canada's oldest Flow Throughs:

We generally only recommend flow through shares to higher income, higher net worth clients. We suggest a minimum investment of $5,000. Investing in flow throughs to offset around 10%-20% of income can be a good target. They become even more attractive if you have unused capital losses. We would also recommend you have a good accountant to help you through the extra paperwork that holding a few flow throughs will generate at tax time. And remember, the flow through is not liquid for 2 years.

Lastly, this type of investment would be most appropriate if you already have resource stocks in your portfolio (most Canadians do). So, we might be inclined to reduce your resource holdings by the same amount, and simply convert your resource equity investments to tax advantaged resource equity investments.

We currently have 8 flow through issuers available. Please contact us if you would like to explore (pun intended) adding resource flow throughs to your portfolio.

More on flow throughs

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Morningstar Stewardship Grades

Capital International Scores Straight A's

Morningstar recently updated their Stewardship Grades of Canadian Mutual Fund Providers. While Capital International funds are not well known in Canada, this large US-based fund management company was the only firm to score straight A's in the 2012 rankings.

Morningstar's Stewardship Grades are part of the process we use in updating our recommended list. The grades are a premium subscription service of Morningstar, so we can't reproduce the information here, but if you are interested, please ask us for a copy when you meet with us next.

Interestingly, the Capital International Global Equity fund is now the 4th largest holding for our clients, as it has been a terrific performing international investment and has been on our recommended list for some time:

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This newsletter and plagiarism?

Recently there has been a lot of media focus on plagiarism. That got me thinking about "ghost-written" articles. I'm proud to say that we write our own content in this newsletter. I'm not quite sure if all our clients realize that our Managed Money Reporter newsletter is written primarily for clients of the Spiess McGlade team (and also for prospective clients). It represents the views of (and is written by) our team, including Carl, Allan, Andrew and others. This newsletter is not a compilation of ghost-written articles. That sort of newsletter is also good but based on the feedback we get on the Managed Money Reporter, I am hoping that our personal effort adds value for you. ScotiaMcLeod Wealth Matters, on the other hand, is a good ghost written newsletter to which we can add our pictures and then send to our clients. What do you think? We'd love to hear your opinion. Please take our short newsletter survey (1 question, plus optional name field):

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New photos, new email format

Allan and I have updated our photos on this site, to reflect the reality that we've all grown a bit older. Be sure to check out team bio page to catch up with all of the members of the managed money reporter.

ScotiaMcLeod's email format has also changed slightly, we are now in the format of firstname.lastname@scotiamcleod.com. Please update your email address book when you have a moment. While the "firstname_lastname@scotiamcleod.com" format will continue to work for some time, our very old "@scotia-mcleod.com" or "@scotiacapital.com" emails no longer seem to come through to us. There is no change to the spiessmcgladeteam@scotiamcleod.com email address which we encourage you to use for any general inquiries.

Finally, please note that on Tuesday, February 11th, 2013, ScotiaMcLeod will be upgrading our email servers. There is a possibility that emails sent to us that evening maybe bounce back. We apologize for any inconvenience and remind you that trading instructions always need to executed on the phone, not email or voice mail.


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Recommended Link of the Month

Globe Investor is a site that we use regularly to review mutual fund, ETF, stock and index performance, in addition to our standard Morningstar reports and ThomsonOne quotes. It is nice to see that it is not part of the Globe and Mail website that is going up behind a paywall (find out which sections are outside the paywall), although some of its features have long only been available to premium subscribers. We do have a Globe Investor Gold subscription, so if there is ever a piece that you are interested in but don't want to subscribe, just ask us and we will have that information available to discuss at your next portfolio review.

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

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