Summer Newsletter 2006

In preparation for writing this newsletter I reviewed the last issue from November 2005. The major issues affecting investors at that time were; avian flu, terrorist attacks in the Middle East, record high oil prices, and rising interest rates. Seven months later the news is quite similar and the issues largely unchanged. The uncertainty in the Middle East continues which is causing higher oil prices – stimulative for certain sectors Canada’s economy, but negative for manufacturers in Canada and the rest of the world. Higher oil prices ultimately impact inflation rates since higher input costs for manufacturers lead to higher prices being passed onto the consumer. If this cycle persists eventually the economies slow down because prices rise high enough to reduce consumer demand. That inflation has remained relatively muted is testament to how successful China and India have been in exporting deflation to the rest of the world.

The strategy for successful long-term investing doesn’t change with the news headlines. Make sure you own enough guaranteed investments (roughly the same percentage as your age), which gives you a secure base of capital and income. Own equities in Canada and internationally and make sure these are solidly managed and well diversified. Most
Canadians own equities through mutual funds and many of these managers have done an excellent job of growing their investor’s capital while minimizing risk.

Combine some different investments into the mix, like mortgage investment certificates and income trusts; these can increase your retirement income. Consider investments which emphasize income, ie. dividend funds and monthly income funds, which tend to have lower volatility hence produce more stable returns. In addition, these investments produce more tax-efficient income than interest bearing investments.

Estate Friendly Investing

Many retirees plan and implement their investments without giving any consideration to the impact these decisions will have on their estate plan. Income tax on estate assets, probate fees, survivor’s income, and protection of capital are just some of the planning issues that need to be considered as investment choices are made. Some investments are available that eliminate probate fees and can be passed directly to the heirs; this also avoids complications with the Wills Variation Act. If your situation involves a second marriage or you plan on an unequal estate distribution to your children then you need to be especially careful with your planning and aware of the Wills Variation Act.

On the subject of estate planning, every B.C. resident should have a current will drafted in B.C by a lawyer or notary public. They should also have an enduring power of attorney and a representation agreement. The P/A allows your financial affairs to be managed in the event of your incapacity and the representation agreement covers your health care wishes. Another estate planning tool which is receiving more and more attention is the alter-ego trust and joint partner trust.

Alter Ego & Joint Partner Trusts

Trusts have been around for a long time, but until recently the settlor of a trust could not be a beneficiary of a trust. The settlor is the person who contributes property to a trust and the beneficiary is the one who receives the distributions of investment earnings and capital from the trust. This meant that you couldn’t use a trust to hold your assets and receive an income. Recent amendments to the Income Tax Act recognize two new types of trusts. Under CCRA’s rules, if you are 65 years of age or older you can transfer assets, including assets that have appreciated in value, to an Alter Ego Trust without triggering capital gain – the transfer is considered a “rollover”.

While you are alive you must be the only beneficiary of the trust. On your death, the capital gains are taxed in the trust just as they would have been if you still owned the assets yourself. Once the tax is paid, the assets can be distributed to beneficiaries you have named or the trust can continue to hold the assets for those beneficiaries until a later date ( the summer cottage for example). If capital gains tax will be payable by the trust, you can reduce the tax owing by naming a registered charity as one of the ultimate beneficiaries.

A Joint Partner Trust is for couples and is the same as above except both spouses are beneficiaries during their lifetimes. For example, one spouse transfers assets to a joint partner trust. No capital gains tax would be payable on those assets until both spouses died.

Although both spouses should have valid Wills, by using an alter ego or joint partner trust, your assets are governed by the trust terms rather than by your will. You retain control of the assets during your lifetime for as long as you want, and you can appoint a trustee to manage the assets for you if you become incapable or after your death. Also, because the trust assets do not form part of your estate, they are not subject to probate fees.

Transferring appreciated assets to one of these new trusts allows you to:

avoid probate fees on the assets transferred to the trust
avoid Wills Variation attacks
avoid attacks by creditors
protect your children from their creditors, including ex-spouses
move ownership out of the province to a lower tax jurisdiction

The preceding information on Alter Ego and Joint Partner Trusts was condensed from an article prepared by Brenda McEachern, B.Comm, LLB, TEP, estate and trust lawyer with Canada Life.

You would normally not want to transfer your house into one of these trusts since the tax-free treatment of capital gains on your principal residence would be lost. As well RRIF assets cannot be transferred into a trust without triggering taxation on the entire amount. There are initial set-up costs ranging from $ 4,000 to $8,000 and annual legal and accounting fees. Whether or not an Alter Ego or Joint Spouse trust makes sense for you depends on your personal circumstances and objectives, but these relatively new trusts are proving to be a popular planning tool for many retirees.

Interest Rates and Fixed Income Investments

Interest rates have improved since our last newsletter, although the steady increases of the past several months are probably over. One year GIC rates were 3.65% in November 2005 and they are now 4.45%; five year rates also increased during this period although not as much as the one year rate. Many analysts are now saying that long term rates may decline over the next 6 months and it appears that the Bank of Canada will not continue its short term rate increases. In view of the present circumstances we are advising clients with GICs or bonds coming due, to consider reinvesting those deposits for 5 years.

Our MRS High Yield Account continues to be popular with our clients who like instant access to their money while earning a competitive rate of interest. There are no minimum balances on this account and unlimited withdrawals that are deposited directly to your chequing account. Currently this account is paying 3.75%.

Summer Holidays

Our office will be open throughout July and August, however, Rod and Lilis will be out of the office from August 21st through to September 4th. We hope you enjoy your summer with family and friends and look forward to seeing you in the fall.

Summer Newsletter
July, 2006

202-4450 Chatterton Way, Victoria, BC, V8X 5J2 Phone: 250-475-6700 Fax: 250-475-6777 Email: roda@halseyfinancial.com