In This Issue

IF DREAMS COME TRUE…

By Gordon Pape, Editor and Publisher

There’s a lot of optimism and hope in the new federal budget. It has even been suggested that some of Finance Minister Jim Flaherty’s economic and fiscal projections amount to wishful thinking or perhaps even dreaming.

But let’s suppose for a moment that his forecasts and those of the private sector, which were extensively quoted in the budget plan, actually come to pass. If that were to happen, Canada would become one of the most attractive places in the world for investors. In fact, foreign money would pour in so fast that holding the loonie to anywhere near par would become a major challenge for the Bank of Canada.

Think about it. If the Finance Minister and private sector analysts are anywhere near the mark in their predictions, Canada will be back to a balanced budget in five years. We will have the lowest net debt to GDP ratio, by far, among the G7 industrialized nations. Taxes will remain stable while the ratio of program spending to GDP will decline. Unemployment will drop from 7.9% in 2011 to 6.6% in 2014. Inflation will remain close to the Bank of Canada’s 2% target. Our currency will be strong. Our banking system will continue to be a model for the world. We’ll have a national securities regulator. Canada will be the first G20 country to offer a tariff-free zone for manufacturers. We’ll have the lowest corporate tax rate in the G7. What’s not to like?

Of course, for all this to take place everything would have to unfold without a hitch. A few small hiccups and it would be back to the drawing board. For example, the budget estimates that a one-year decrease of one percentage point in the GDP forecasts would have a negative impact of $3.1 billion on the budget projections in the first year, increasing to $4.4 billion in year five. A sustained one percentage point increase in projected interest rates would add $1 billion to the deficit in the first year and $3 billion by the fifth year.

“Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues,” the budget plan states.

The budget doesn’t even address the possibility of a double-dip recession that would obviously throw all the carefully prepared forecasts out the window. Mr. Flaherty admitted during his budget press conference that there are many potential economic threats lurking but he and his fellow cabinet ministers are apparently operating on the assumption that none of them will materialize. Murphy’s Law suggests they’re wrong.

So let’s not pop the Champagne corks just yet. There are still a lot of potential trouble spots along the way. That said, the historical numbers show that we are in a better position than the other countries of the G7, including the United States. The Conservatives can’t take credit for the decade of federal surpluses that left us on such a strong footing (Paul Martin and Jean Chretien get the kudos for that) but if they can deliver on their agenda going forward, they may finally gain the prize they have been seeking for so long: a majority government.

But that’s politics. What we care about most in this newsletter is the outlook for our investments. If this budget turns out to be anywhere near accurate in terms of its forecasts, Canada will be a pretty good place for your money in the coming years.

 

Gordon Pape’s new book is The Ultimate TFSA Guide, published by Penguin Group Canada. Order your copy now at 28% off the suggested retail price by going to http://astore.amazon.ca/buildicaquizm-20

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

THE LAST NAIL

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Although it was clear a couple of years ago that the Conservatives were not going to retreat from their campaign to destroy the income trusts sector, some people never gave up hope that somehow the government could be persuaded to change its mind or at least take steps to soften the blow.

This budget was the last chance for Finance Minister Jim Flaherty to do that. As any realistic person who has watched this story evolve could have predicted, he did nothing. The last faint hope vanished when his silence drove the final nail into the coffin.

Well, that’s not quite true. He did do something, just not what the diehards wanted. The Finance Minister closed a loophole that made it possible for trusts to convert to corporations while gaining significant tax breaks in the process. More on that in a moment.

What he did not do was introduce a program along the lines of the so-called “Marshall Plan” that would have effectively grandfathered some trusts. The idea had been aggressively promoted by trust advocacy groups and by some respected journalists like Diane Francis of the National Post.

Nor did Mr. Flaherty do anything to ease the impact of the trusts’ demise on registered plans. Distributions from trust units (or their shares after they convert to corporations) that are paid into RRSPs, RRIFs, TFSAs, etc. will not be eligible for the dividend tax credit (DTC). So those investors will bear the full brunt of the new tax regime. By contrast, units or shares in non-registered accounts will benefit from the tax benefits of the DTC. In some cases investors may actually end up with a higher after-tax return as a result.

The one change the Finance Minister did introduce was to eliminate the use of tax-loss conversion strategies which some trusts had used to reduce the taxes they would have to pay after becoming corporations. However, he did not make the change retroactive, thereby eliciting sighs of relief from companies like Colabor Group, Algonquin Power, and Bonterra Energy, all of which were identified by RBC Capital Markets as among the seven who had made use of these tactics. Also, Mr. Flaherty will allow any similar transactions which have already been agreed to in writing to proceed.

The strategy involves a trust purchasing a company with large available tax write-offs and then using those tax assets to maintain distributions after converting to a corporation. Mr. Flaherty had been asked about this several weeks ago and his response at the time raised concerns that the government would go after trusts that had already made use of the loophole. That won’t happen, unless of course government auditors find some evidence of wrongdoing down the road. But any trusts that had been contemplating using this strategy to protect unitholders have now been stymied.

This budget should bring an end to the trust debate. In my view, the policy was flawed from the outset and more should have and could have been done to protect unitholders. They did nothing wrong and had every right to expect trusts would continue to do business as usual on the basis of a specific Conservative Party promise.

But, as I have said several times before, we have to live in the real world and that means a financial system without income trusts. Anyone looking for above-average yields needs to shift their attention to high-dividend stocks and REITs. – G.P.

 

IRWIN MICHAEL: RESULTS BEATING EXPECTATIONS

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Contributing editor Irwin Michael is with us this week with some positive views on the choppy markets we have experienced thus far in 2010. Irwin one of Canada’s leading practitioners of deep value investing and is founder and president of the ABC funds, all of which are performing extremely well. The flagship ABC Fundamental-Value Fund was up 56.6% in the 12 months to Jan. 31. Here is his report.

Irwin Michael writes:

Interestingly, while North American stock markets during the past four weeks have exhibited robust equity returns, individual stock prices have been choppy and inconsistent. This volatility has been largely caused by recently unexpected and disappointing economic news such as lower U.S. housing starts, weaker factory orders, and increasing American initial unemployment insurance claims. What is doubly frustrating to investors is that although most economists acknowledge that the North American economies are pulling out of recession, the actual evidential data remains quite contradictory. For instance, despite massive worldwide monetary and fiscal stimulation, a number of economic indicators such as unemployment statistics, consumer spending, capital expansion expenditures, as well as a precarious American domestic banking situation, worsening sovereign debt problems i.e. Greece, Dubai et al continue to plague the economic and investment outlook. These circumstances in turn, have enervated both consumer and investor confidence.

In short, the 2009-2010 global economic recovery has been a painfully slow advance despite massive government stimulation. As a result, investors have been confronted with incessant share price volatility and inconsistent economic, political, and investment events, adding to their investment hesitation. Nevertheless, on the positive side, it is our view that with an extended period of historically low interest rates of under 1% as well as the ongoing government economic intervention, the occasional excellent investment opportunity will be presented. It is our continuing belief that while the global economic recovery will be a slow but steady work in progress, there remains considerable pent-up growth potential. True, there must be considerable ongoing repair with regard to our lending institutions, the need to reduce massive government financial deficits, and spending shortfalls. However, it is our belief that economic activity is on track toward greater improvement into 2011 and 2012.

As investors we will be tested continuously, necessitating extreme patience, discipline, and determination. It is our belief, furthermore, that this is a “stock picker’s market”. Not all common stocks will do well. We expect to be challenged by the extreme market volatility in the context of a saw-tooth-like upward advance. We are, however, heartened by most corporate earnings results which appear to be well ahead of investors’ expectations. Additionally, we expect gradually improving corporate profits via greater worker productivity to be eventually followed by top-line revenue growth.

In summary, we remain relatively optimistic and, once again, conclude that with many investors having low investment and economic expectations, any positive surprise or catalyst could precipitate a momentous stock market advance.

 

IRWIN MICHAEL’S UPDATES

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Canam Group Inc. (TSX: CAM, OTC: CNMGA)

Originally recommended on July 7/08 (IWB #2824) at C$10.42, US$11.09. Closed Friday at C$8.14.

Canam Group recently reported sales of $625.8 million, net earnings of $20.1 million, and earnings per share (EPS) of 45c for fiscal 2009. During the worst year of the global recession, Canam remained profitable, largely due to bridge building and repair work and several large-scale structural steel projects. Importantly, Canam’s rock-solid balance sheet gave the company plenty of financial flexibility through the downturn. At the end of 2009, Canam’s net debt was only $300,000 compared to $69.9 million at the end of 2008. The company’s net debt to equity ratio is now negligible, with shareholders’ equity of $400.6 million, or $8.83 per share.

We believe that these financial results will likely be overshadowed by the announcement on Feb. 23 that Canam had increased its ownership in FabSouth from 15% to 80% for US$65 million. Further, the company has agreed to acquire the remaining 20% over a three-year period starting in 2011 for an amount ranging between US$15 million and US$25 million depending on EBITDA generated in 2010, 2011, and 2012.

As we suggested to in our last update, we believed that the initial purchase of 15% of FabSouth was just the first step in acquiring the entire entity. Remember that FabSouth is a leading structural steel fabricator that operates six plants located in Florida, North Carolina, and Georgia. The company has approximately US$8 million to US$9 million in debt and about US$20 million of cash on its balance sheet. The founders will continue to be involved in the business, which will be led by Kurt Langsenkamp, FabSouth’s president since inception.

Because historic financial statements are unavailable, we are still working through the financial metrics of the transaction. However, Canam has suggested that between 2007 and 2009, FabSouth’s sales averaged more than US$325 million, bottoming at about US$250 million and peaking at about US$400 million. Marcel Dutil implied that he had sold his 15% stake to Canam at just above two times EBITDA, while the 65% interest was purchased at a slightly higher multiple but below three times EBITDA. Essentially, Canam Group will be paying approximately US$90 million to US$100 million for $50 million of incremental EBITDA.

Although the reaction was slightly delayed, the market is beginning to grasp the significance of this transaction. Marc Dutil has astutely deployed some of the firepower on Canam’s pristine balance sheet and the strong Canadian dollar to make a significant and accretive acquisition in the United States at very attractive multiples. Further, the announcement from Commercial Metals Company, a large U.S.-based steel manufacturer, indicating that it is exiting the joist and deck business implies reduced competition through the next cycle. We believe that this acquisition could be the catalyst to drive the stock price closer to the company’s book value of $8.83 per share. Note that the shares of Canam Group finally broke above the upper boundary of the stock’s recent trading range and powered above $8 per share in the days following the news release.

Action now: Buy on any pullback to below $8.

Playmates Holdings Ltd. (HKEx: 635, OTC: PYHOF) and Playmates Toys (HKEx: 869, OTC: PMTYF)

Originally recommended on June 4/07 (IWB #2721) at US$1.35 (adjusted for consolidation). Latest U.S. quotes: US31.5c and US9c respectively.

After patiently watching shares of Playmates Holdings Limited (PHL) and Playmates Toys Limited (PTL) recover from the credit-crisis lows, we have exited both positions. PHL reached a 52-week low of HK$0.81 per share and currently trades at approximately HK$2.50 per share, more than tripling from the bottom. PTL hit a 52-week low of HK$0.055 per share and currently trades at approximately HK$0.88 per share, an amazing bounce by any standard. To put it mildly, the past two and a half years have been a roller-coast ride for investors.

To make a long story short, we had identified several warning signs in a previous comment. Essentially, we became concerned with the sales decline and operating margin compression at PTL. The welcome adoption of more stringent safety standards led to an increase in close-out sales and higher costs. At PHL, we were concerned with the write-down on the company’s real estate investments and large net losses on portfolio investments. After careful consideration and in light of other investment opportunities we decided to liquidate our positions.

Action now: Sell.

Fortress Paper (TSX: FTP)

Originally recommended on Oct. 1/07 (IWB #2736) at $7.82. Closed Friday at $14.87.

Fortress Paper has made a big move since our last update in early January when we advised buying at $9.50. It closed on Friday at $14.87, up 56.5% in the past two months and ahead by 90% since our original recommendation.

We’ll provide a more complete review of the stock at a later time but the rapid price increase necessitates a brief update now. In early February, the company announced record fourth-quarter earnings of $3.7 million (35c a share) on sales of $51 million. This compares with earnings of $2.8 million (28c a share) in the comparable period of 2008. For the full 2009 fiscal year, Fortress Paper reported net income of $12.7 million ($1.23 per share) on sales of $198.3 million. These strong results contributed to pushing the share price higher.

Although the stock is still reasonably priced, trading at 12.1 times trailing earnings, it is no longer the deep bargain it was at the time we recommended it or at our last update. Therefore, we are changing our guidance to Hold.

Action now: Hold.

– end Irwin Michael

GORDON PAPE’S UPDATES

Tim Hortons (TSX, NYSE: THI)

Originally recommended on July 20/09 (IWB #2927) at C$28.88, US$25.91. Closed Friday at C$32.73, US$31.74.

Recession or not, our passion for coffee and doughnuts hasn’t diminished. In fact, we’re buying more than ever judging by the terrific year-end results from Tim Hortons. The company reported fourth quarter net income of $91 million (51c a share, fully diluted), a 32% improvement from the profit of $69.1 million (38c a share) for the same period in 2008. For the full fiscal year, Tim Hortons earned $296.4 million ($1.64 a share) compared to $284.7 million ($1.55 a share) in 2008. Same-store sales for 2009 increased by 2.9% in Canada and 3.2% in the U.S.

“Our focus on being relevant to our customers and responding to their needs continues to position Tim Hortons among the leaders in the North American restaurant sector,” said CEO Don Schroeder. ‘Our record revenue and earnings performance in 2009 once again demonstrated the resiliency of our brand in difficult economic circumstances and we were pleased with the ability of our system to continue to successfully grow in challenging times.”

The company celebrated by passing on some of the goodies to shareholders. The target dividend payout range was increased to 30% to 35% of prior year normalized annual net earnings and the quarterly dividend is being raised by 30% to 13c a share (52c a year). The next dividend payment, due March 23, will reflect the higher rate. The company also announced a $200 million share buyback program for up to 5% of the stock.

Perhaps anticipating that the higher dividend and buyback program will divert money from future growth, CFO Cynthia Devine assured analysts and investors that the company can have its doughnuts and eat them too.

“Our confidence in future growth and proven capacity to generate strong free cash flow positions us well to continue our number one priority of funding our business growth investment needs while still returning value to shareholders in the form of increased dividends and a new share repurchase program,” she said.

As if to underline this point, the company said on Friday it plans to open 900 new stores over the next three years of which two-thirds will be in Canada.

Despite all this good news, the share price showed little movement after the results came out. However, we have done well with the stock since it was recommended in July 2009. The Canadian dollar price is up 13.3% since then while the U.S. dollar value is ahead by 22.5%, boosted by the increase in the value of the loonie.

Action now: Buy.

RioCan REIT (TSX: REI.UN, OTC: RIOCF)

Originally recommended on April 20/98 (IWB #9814) at C$10.90. Closed Friday at C$18.86, US$18.35.

These are not good times for Canada’s largest real estate investment trust (REIT). In fact, CEO Edward Sonshine went so far as to describe 2009 as “a very difficult year”. In corporate-speak that translates roughly as “it stunk”.

RioCan reported net earnings for the fourth quarter of the 2009 fiscal year of $28 million (11c per unit), down from $29 million (14c per unit) for the same period in 2008. Net earnings for the full year were $114 million (49c per unit) compared to $145 million (67c per unit) for 2008. The company said that primary factors for the profit decline were $35 million drop in gains from properties held for resale, a $25 million increase in interest expense, and a $10 million increase in amortization expense.

Funds from operations (FFO) were also way down. For the fourth quarter, FFO was $66 million (28c per unit) compared to $87 million (39c per unit) in the fourth quarter of 2008. For the full year, FFO came in at $276 million ($1.20 per unit) compared to $324 million ($1.48 per unit) in 2008.

This is especially significant because RioCan is currently paying monthly distributions of 11.5c a unit or $1.38 a year. This means it paid out more in distributions in fiscal 2009 than it generated in FFO. As a result, no distribution increase has been announced for 2010 and in fact there is some speculation that the REIT might have to cut its payments. That seems unlikely given that RioCan has cash reserves of $147 million and a payout cut would have a severe impact on the share price. However, it appears that the REIT’s record of 11 consecutive years of distribution increases may be at an end.

Mr. Sonshine tried to put a positive spin on the news, saying that the trust “has been able to set in place a strong platform for future growth in order to take advantage of opportunities as the economy continues to recover.” He went on: “Our conservative approach in 2009 resulted in a short-term drag on our profitability, but has enabled RioCan to take advantage of acquisition opportunities in the fourth quarter and set the stage for material growth in FFO going forward.”

RioCan is venturing into the U.S. for the first time, looking for bargains in what is seen as a distressed market. The trust recently took a 14.3% position in Cedar Shopping Centers, Inc. (NYSE: CDR) which focuses on supermarket-anchored shopping centres and drug store-anchored convenience centres located predominantly in the North-eastern United States.

I am reducing my rating on the shares to Hold until such time as we see improvement in the financials.

Action now: Hold.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)

Originally recommended on April 7/97 (IWB #9713) at C$6.13 (split-adjusted). Closed Friday at C$25.16, US$24.43.

Brookfield released fourth-quarter and year-end 2009 results recently and although the numbers were down on a year-over-year basis, they beat analysts’ expectations and gave a boost to the share price.

The company reported net income of $454 million (71c per share) for 2009 compared to $649 million ($1.02 per share) in 2008 (Brookfield reports its results in U.S. dollars). Net income in 2008 reflected a large non-cash tax recovery arising from an increase in the value of our tax assets.

Cash flow from operations for the fourth quarter increased to $381 million (63c per share) from $247 million (41c per share) compared to the same period in 2008, a 54% increase. For the full year, cash flow from operations was $1.45 billion ($2.43 per share) compared with $2.33 per share reported in 2008.

“Our renewable power and office property businesses generated strong operating cash flows during the quarter and throughout the year,” commented CEO Bruce Flatt. “The stable revenue profiles of these businesses provide us with a strong earnings base in order to continue to pursue investment opportunities at this exceptional point in the market cycle. Furthermore, the substantial amount of capital deployed by us in the last year sets the stage for continued asset value growth in the future.”

In fact, cash-rich Brookfield has been aggressively pursuing opportunities in the U.S. shopping mall area, where many companies are struggling under huge debt loads. On Feb. 24, the company announced an agreement in principle to take a 30% interest in General Growth Properties (GGP), investing $2.625 billion. GGP owns more than 200 regional shopping malls in 44 states and is the second-largest mall operator in the U.S. GGP sought Chapter 11 bankruptcy protection in April 2009 after failing to refinance portions of its $27 billion debt as they came due. It was the biggest real estate bankruptcy in U.S. history.

Watch for more moves of this kind in the coming months as Brookfield seeks to capitalize on what may be a once-in-a-lifetime opportunity to snap up quality properties at cheap prices.

Action now: Buy.


QUICK TAKES

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This week we are introducing a new feature called Quick Takes. It will feature short items on a range of topics we believe will be of interest to members. Some of these will relate to securities on our Recommended List. These will not replace our regular detailed updates but rather will serve to provide supplemental information in a timely manner. Here are this week’s notes.

RBC high on Freeport McMoRan. On Wednesday, RBC Capital Markets issued a glowing report on international mining company Freeport McMoRan (NYSE: FCX), focusing particularly on Freeport’s copper and molybdenum operations. The brokerage firm raised its target price on the stock to US$95, saying that it expects to see growth of 47% in earnings per share and 39% in cash flow per share through 2013. RBC said the company’s strong balance sheet and free cash flow “should support special dividends and share buybacks” starting in the second half of this year. The stock was recommended by Glenn Rogers on Feb. 15 (IWB #10107) at US$73.68. It closed on Friday at US$80.71.

Thomson Reuters raises dividend. This New York-based communications company with Canadian roots, which trades under the symbol TRI, recently announced a modest dividend increase of 1c per quarter. That brings the annual payout to US$1.16 a share. The shares were recommended by Tom Slee on April 13/09 (IWB #2914) at C$33.58, US$27.59. They closed on Friday at C$36.49, US$35.41.

SNC-Lavalin dividend up. We received another dividend increase on one of our recommended stocks on Friday when SNC-Lavalin (TSX: SNC) announced a 13% hike, bringing its quarterly payment to 17c a share. This is another Tom Slee pick dating from May 8/06 (IWB #2618) when he advised buying at $32.45. The shares closed on Friday at $52.35.

 

YOUR QUESTIONS

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More on asset allocation

Q – I am reviewing an asset allocation strategy where there are five to seven types of assets used for a portfolio. One of them is infrastructure. What do they mean by this and how would a self-directed investor apply funds in this area? – Kent N.

A – There are a variety of definitions for “infrastructure” but the word is generally understood to refer to the underlying physical structures of a society such as roads, bridges, sewers, utilities, pipelines, airports, etc. The TSX does not have an infrastructure sub-index although there are several stocks on our Recommended List that would qualify such as construction and engineering firms like SNC-Lavalin, Canam Group, Stantec, and pipeline companies like Enbridge and TransCanada.

Claymore Investments offers a Global Infrastructure ETF which includes several large Canadian companies. About 21% of the portfolio is invested in Canada with 44% in the U.S. and the rest scattered around the world. It trades under the symbol CIF. There are also a handful of mutual funds that focus on infrastructure but most have a very short history.

Depending on how much money you wish to allocate to this sector, you could purchase individual stocks from among those on our Recommended List or you could go with a mutual fund or the Claymore ETF. – G.P.

Retirement portfolio

Q – I just read the current issue of Internet Wealth Builder (Feb. 22). As a retired person, I like this retirement portfolio mentioned in this issue with an asset mix of 35% equities and 65% fixed-income securities. Only I need more advice. In the case of an investment of $100,000, all in mutual funds, what funds are recommended to own now to have this 35%-65% portfolio? Pease offer some of your valuable suggestions. Many thanks. – S.L.

A – We offer a model RRIF portfolio in our companion newsletter, Mutual Funds/ETFs Update. It was launched on Jan. 1, 2009 with a cost base of $25,000. We track it on a regular basis and published the one-year update in the February issue which showed the portfolio gained 13.7% in 2009.

The asset mix comes close to the 35%-65% formula but is slightly more conservative. The updated recommendations published in February have 50% of the portfolio invested in money market and bond funds. The BMO Guardian Monthly Dividend Fund is given a 10% weighting. At least half its assets are in preferred shares, thus adding another 5% to the overall fixed-income weight in the portfolio.

There are two balanced funds in the mix, each representing 15% of the total. Mackenzie Sentinel Income Fund is required to hold at least 60% of its assets in bonds, cash, etc., thereby adding 9% to the portfolio’s overall fixed-income weighting. Fidelity Monthly Income Fund has a 30% bonds/cash weighting at present, adding another 4.5% to the fixed-income component. That gives a total portfolio weighting of 31.5% equities and 68.5% fixed-income.

Here is the latest RRIF portfolio, as published in the February Mutual Funds/ETFs Update.

REVISED RRIF PORTFOLIO

Fund Name
Weight
PH&N Canadian Money Market
5%
PH&N Short Term Bond and Mortgage
15%
Beutel Goodman Income
15%
iShares CDN Corporate Bond Index
15%
Mackenzie Sentinel Income B
15%
GGOF Monthly Dividend Classic
10%
Fidelity Monthly Income
15%
iShares CDN REIT Sector Index
10%
Totals
100%

We review the model portfolios every six months in the newsletter. – G.P.

Looking for 5%

Q – I have been a subscriber to IWB since it began many years ago. Your letter and your recommendations have been of great help to my wife and me to build a RRSP for our retirement.
 
My wife is already 65 and she is receiving OAS. I will begin to receive it two months from now. Our house is paid for and we have no debt. We will each receive a $350 monthly payment from the Quebec Pension Plan. Finally, we have an RRSP totalling $800,000.
 
We estimate that we can get by yearly with $60,000. In other words, if we could secure a 5% return from our RRSP, we would be fine. What would you suggest as a safe way to get this kind of return in the years ahead? Thank your very much for your help and advice. – André B.

A – I can’t provide individual counselling but the sample RRIF portfolio above may be a helpful place to start. In your case, most of the RRSP assets (65% to 70%) should be invested in high-grade fixed-income securities or funds. A 5% return should be quite achievable without undue risk. You may wish to consult a fee-for-service financial planner for specific recommendations. – G.P.


MEMBERS’ CORNER

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TFSA puzzler

Member comment: I read with great interest your recent column on TFSAs indicating Mackenzie Financial had discovered that Canadians don’t know much about Tax-Free Savings Accounts. In this regard I would like to offer one more question: “Which Canadians are NOT eligible to have a TSFA?”
 
Answer: “Canadians who do not reside in Canada”.
 
In my case I am a non-resident, however the CRA classifies me as a “Deemed Resident for Tax Purposes”. As a consequence I pay my Canadian income taxes each year and have no problem with that. However, due to my status as a non-resident, I am not allowed to have a TFSA. If I recall correctly one must reside in Canada for more than six months in order to qualify for a TFSA. As a retiree I reside outside Canada to avoid the winter weather and I do not have the resources to own a home in Canada and also in my current country of residence. Hence I spend nearly all my time outside Canada. 
 
I consider not being allowed to have a TSFA a very unfortunate and unfair regulation since I an subject to all of the obligations of a Canadian taxpayer, yet Revenue Canada chooses to disqualify me (and of course others in similar situations) from a simple and attractive benefit such as the TFSA.   
 
I would be interested in knowing whether anyone else has raised this issue.
 
Also I wonder if I were to return to Canada at some time in the future as a full time resident, if I would be able to open a TSFA at that time and make retroactive contributions back to the 2009 calendar year. – Edgar D.
 
Response: To be precise, the Department of Finance sets the rules, not the Canada Revenue Agency. It just administers them. You are correct that non-residents cannot open a TFSA nor do they accrue any contribution room if they return at a later time. There are important legal distinctions between “factual residents” and “deemed residents”. They are too complex to go into here but if you want more information consult the CRA Interpretation Bulletin IT-221R3 which can be downloaded at http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf – G.P.

 

That’s all for now. We’ll be back on March 15.

Best regards,

Gordon Pape
gordon.pape@buildingwealth.ca
Circulation matters: customer.service@buildingwealth.ca

All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. None of the content in this newsletter is intended to be, nor should be interpreted as, an invitation to buy or sell securities. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers, contributors, and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. The staff of and contributors to the Internet Wealth Builder may hold positions in securities mentioned in this newsletter, either personally or through managed accounts. No compensation for recommending particular securities, services, or financial advisors is solicited or accepted.

In This Issue

IF DREAMS COME TRUE…

By Gordon Pape, Editor and Publisher

There’s a lot of optimism and hope in the new federal budget. It has even been suggested that some of Finance Minister Jim Flaherty’s economic and fiscal projections amount to wishful thinking or perhaps even dreaming.

But let’s suppose for a moment that his forecasts and those of the private sector, which were extensively quoted in the budget plan, actually come to pass. If that were to happen, Canada would become one of the most attractive places in the world for investors. In fact, foreign money would pour in so fast that holding the loonie to anywhere near par would become a major challenge for the Bank of Canada.

Think about it. If the Finance Minister and private sector analysts are anywhere near the mark in their predictions, Canada will be back to a balanced budget in five years. We will have the lowest net debt to GDP ratio, by far, among the G7 industrialized nations. Taxes will remain stable while the ratio of program spending to GDP will decline. Unemployment will drop from 7.9% in 2011 to 6.6% in 2014. Inflation will remain close to the Bank of Canada’s 2% target. Our currency will be strong. Our banking system will continue to be a model for the world. We’ll have a national securities regulator. Canada will be the first G20 country to offer a tariff-free zone for manufacturers. We’ll have the lowest corporate tax rate in the G7. What’s not to like?

Of course, for all this to take place everything would have to unfold without a hitch. A few small hiccups and it would be back to the drawing board. For example, the budget estimates that a one-year decrease of one percentage point in the GDP forecasts would have a negative impact of $3.1 billion on the budget projections in the first year, increasing to $4.4 billion in year five. A sustained one percentage point increase in projected interest rates would add $1 billion to the deficit in the first year and $3 billion by the fifth year.

“Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues,” the budget plan states.

The budget doesn’t even address the possibility of a double-dip recession that would obviously throw all the carefully prepared forecasts out the window. Mr. Flaherty admitted during his budget press conference that there are many potential economic threats lurking but he and his fellow cabinet ministers are apparently operating on the assumption that none of them will materialize. Murphy’s Law suggests they’re wrong.

So let’s not pop the Champagne corks just yet. There are still a lot of potential trouble spots along the way. That said, the historical numbers show that we are in a better position than the other countries of the G7, including the United States. The Conservatives can’t take credit for the decade of federal surpluses that left us on such a strong footing (Paul Martin and Jean Chretien get the kudos for that) but if they can deliver on their agenda going forward, they may finally gain the prize they have been seeking for so long: a majority government.

But that’s politics. What we care about most in this newsletter is the outlook for our investments. If this budget turns out to be anywhere near accurate in terms of its forecasts, Canada will be a pretty good place for your money in the coming years.

 

Gordon Pape’s new book is The Ultimate TFSA Guide, published by Penguin Group Canada. Order your copy now at 28% off the suggested retail price by going to http://astore.amazon.ca/buildicaquizm-20

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

THE LAST NAIL

Although it was clear a couple of years ago that the Conservatives were not going to retreat from their campaign to destroy the income trusts sector, some people never gave up hope that somehow the government could be persuaded to change its mind or at least take steps to soften the blow.

This budget was the last chance for Finance Minister Jim Flaherty to do that. As any realistic person who has watched this story evolve could have predicted, he did nothing. The last faint hope vanished when his silence drove the final nail into the coffin.

Well, that’s not quite true. He did do something, just not what the diehards wanted. The Finance Minister closed a loophole that made it possible for trusts to convert to corporations while gaining significant tax breaks in the process. More on that in a moment.

What he did not do was introduce a program along the lines of the so-called “Marshall Plan” that would have effectively grandfathered some trusts. The idea had been aggressively promoted by trust advocacy groups and by some respected journalists like Diane Francis of the National Post.

Nor did Mr. Flaherty do anything to ease the impact of the trusts’ demise on registered plans. Distributions from trust units (or their shares after they convert to corporations) that are paid into RRSPs, RRIFs, TFSAs, etc. will not be eligible for the dividend tax credit (DTC). So those investors will bear the full brunt of the new tax regime. By contrast, units or shares in non-registered accounts will benefit from the tax benefits of the DTC. In some cases investors may actually end up with a higher after-tax return as a result.

The one change the Finance Minister did introduce was to eliminate the use of tax-loss conversion strategies which some trusts had used to reduce the taxes they would have to pay after becoming corporations. However, he did not make the change retroactive, thereby eliciting sighs of relief from companies like Colabor Group, Algonquin Power, and Bonterra Energy, all of which were identified by RBC Capital Markets as among the seven who had made use of these tactics. Also, Mr. Flaherty will allow any similar transactions which have already been agreed to in writing to proceed.

The strategy involves a trust purchasing a company with large available tax write-offs and then using those tax assets to maintain distributions after converting to a corporation. Mr. Flaherty had been asked about this several weeks ago and his response at the time raised concerns that the government would go after trusts that had already made use of the loophole. That won’t happen, unless of course government auditors find some evidence of wrongdoing down the road. But any trusts that had been contemplating using this strategy to protect unitholders have now been stymied.

This budget should bring an end to the trust debate. In my view, the policy was flawed from the outset and more should have and could have been done to protect unitholders. They did nothing wrong and had every right to expect trusts would continue to do business as usual on the basis of a specific Conservative Party promise.

But, as I have said several times before, we have to live in the real world and that means a financial system without income trusts. Anyone looking for above-average yields needs to shift their attention to high-dividend stocks and REITs. – G.P.

 

IRWIN MICHAEL: RESULTS BEATING EXPECTATIONS

Contributing editor Irwin Michael is with us this week with some positive views on the choppy markets we have experienced thus far in 2010. Irwin one of Canada’s leading practitioners of deep value investing and is founder and president of the ABC funds, all of which are performing extremely well. The flagship ABC Fundamental-Value Fund was up 56.6% in the 12 months to Jan. 31. Here is his report.

Irwin Michael writes:

Interestingly, while North American stock markets during the past four weeks have exhibited robust equity returns, individual stock prices have been choppy and inconsistent. This volatility has been largely caused by recently unexpected and disappointing economic news such as lower U.S. housing starts, weaker factory orders, and increasing American initial unemployment insurance claims. What is doubly frustrating to investors is that although most economists acknowledge that the North American economies are pulling out of recession, the actual evidential data remains quite contradictory. For instance, despite massive worldwide monetary and fiscal stimulation, a number of economic indicators such as unemployment statistics, consumer spending, capital expansion expenditures, as well as a precarious American domestic banking situation, worsening sovereign debt problems i.e. Greece, Dubai et al continue to plague the economic and investment outlook. These circumstances in turn, have enervated both consumer and investor confidence.

In short, the 2009-2010 global economic recovery has been a painfully slow advance despite massive government stimulation. As a result, investors have been confronted with incessant share price volatility and inconsistent economic, political, and investment events, adding to their investment hesitation. Nevertheless, on the positive side, it is our view that with an extended period of historically low interest rates of under 1% as well as the ongoing government economic intervention, the occasional excellent investment opportunity will be presented. It is our continuing belief that while the global economic recovery will be a slow but steady work in progress, there remains considerable pent-up growth potential. True, there must be considerable ongoing repair with regard to our lending institutions, the need to reduce massive government financial deficits, and spending shortfalls. However, it is our belief that economic activity is on track toward greater improvement into 2011 and 2012.

As investors we will be tested continuously, necessitating extreme patience, discipline, and determination. It is our belief, furthermore, that this is a “stock picker’s market”. Not all common stocks will do well. We expect to be challenged by the extreme market volatility in the context of a saw-tooth-like upward advance. We are, however, heartened by most corporate earnings results which appear to be well ahead of investors’ expectations. Additionally, we expect gradually improving corporate profits via greater worker productivity to be eventually followed by top-line revenue growth.

In summary, we remain relatively optimistic and, once again, conclude that with many investors having low investment and economic expectations, any positive surprise or catalyst could precipitate a momentous stock market advance.

 

IRWIN MICHAEL’S UPDATES

Canam Group Inc. (TSX: CAM, OTC: CNMGA)

Originally recommended on July 7/08 (IWB #2824) at C$10.42, US$11.09. Closed Friday at C$8.14.

Canam Group recently reported sales of $625.8 million, net earnings of $20.1 million, and earnings per share (EPS) of 45c for fiscal 2009. During the worst year of the global recession, Canam remained profitable, largely due to bridge building and repair work and several large-scale structural steel projects. Importantly, Canam’s rock-solid balance sheet gave the company plenty of financial flexibility through the downturn. At the end of 2009, Canam’s net debt was only $300,000 compared to $69.9 million at the end of 2008. The company’s net debt to equity ratio is now negligible, with shareholders’ equity of $400.6 million, or $8.83 per share.

We believe that these financial results will likely be overshadowed by the announcement on Feb. 23 that Canam had increased its ownership in FabSouth from 15% to 80% for US$65 million. Further, the company has agreed to acquire the remaining 20% over a three-year period starting in 2011 for an amount ranging between US$15 million and US$25 million depending on EBITDA generated in 2010, 2011, and 2012.

As we suggested to in our last update, we believed that the initial purchase of 15% of FabSouth was just the first step in acquiring the entire entity. Remember that FabSouth is a leading structural steel fabricator that operates six plants located in Florida, North Carolina, and Georgia. The company has approximately US$8 million to US$9 million in debt and about US$20 million of cash on its balance sheet. The founders will continue to be involved in the business, which will be led by Kurt Langsenkamp, FabSouth’s president since inception.

Because historic financial statements are unavailable, we are still working through the financial metrics of the transaction. However, Canam has suggested that between 2007 and 2009, FabSouth’s sales averaged more than US$325 million, bottoming at about US$250 million and peaking at about US$400 million. Marcel Dutil implied that he had sold his 15% stake to Canam at just above two times EBITDA, while the 65% interest was purchased at a slightly higher multiple but below three times EBITDA. Essentially, Canam Group will be paying approximately US$90 million to US$100 million for $50 million of incremental EBITDA.

Although the reaction was slightly delayed, the market is beginning to grasp the significance of this transaction. Marc Dutil has astutely deployed some of the firepower on Canam’s pristine balance sheet and the strong Canadian dollar to make a significant and accretive acquisition in the United States at very attractive multiples. Further, the announcement from Commercial Metals Company, a large U.S.-based steel manufacturer, indicating that it is exiting the joist and deck business implies reduced competition through the next cycle. We believe that this acquisition could be the catalyst to drive the stock price closer to the company’s book value of $8.83 per share. Note that the shares of Canam Group finally broke above the upper boundary of the stock’s recent trading range and powered above $8 per share in the days following the news release.

Action now: Buy on any pullback to below $8.

Playmates Holdings Ltd. (HKEx: 635, OTC: PYHOF) and Playmates Toys (HKEx: 869, OTC: PMTYF)

Originally recommended on June 4/07 (IWB #2721) at US$1.35 (adjusted for consolidation). Latest U.S. quotes: US31.5c and US9c respectively.

After patiently watching shares of Playmates Holdings Limited (PHL) and Playmates Toys Limited (PTL) recover from the credit-crisis lows, we have exited both positions. PHL reached a 52-week low of HK$0.81 per share and currently trades at approximately HK$2.50 per share, more than tripling from the bottom. PTL hit a 52-week low of HK$0.055 per share and currently trades at approximately HK$0.88 per share, an amazing bounce by any standard. To put it mildly, the past two and a half years have been a roller-coast ride for investors.

To make a long story short, we had identified several warning signs in a previous comment. Essentially, we became concerned with the sales decline and operating margin compression at PTL. The welcome adoption of more stringent safety standards led to an increase in close-out sales and higher costs. At PHL, we were concerned with the write-down on the company’s real estate investments and large net losses on portfolio investments. After careful consideration and in light of other investment opportunities we decided to liquidate our positions.

Action now: Sell.

Fortress Paper (TSX: FTP)

Originally recommended on Oct. 1/07 (IWB #2736) at $7.82. Closed Friday at $14.87.

Fortress Paper has made a big move since our last update in early January when we advised buying at $9.50. It closed on Friday at $14.87, up 56.5% in the past two months and ahead by 90% since our original recommendation.

We’ll provide a more complete review of the stock at a later time but the rapid price increase necessitates a brief update now. In early February, the company announced record fourth-quarter earnings of $3.7 million (35c a share) on sales of $51 million. This compares with earnings of $2.8 million (28c a share) in the comparable period of 2008. For the full 2009 fiscal year, Fortress Paper reported net income of $12.7 million ($1.23 per share) on sales of $198.3 million. These strong results contributed to pushing the share price higher.

Although the stock is still reasonably priced, trading at 12.1 times trailing earnings, it is no longer the deep bargain it was at the time we recommended it or at our last update. Therefore, we are changing our guidance to Hold.

Action now: Hold.

– end Irwin Michael

GORDON PAPE’S UPDATES

Tim Hortons (TSX, NYSE: THI)

Originally recommended on July 20/09 (IWB #2927) at C$28.88, US$25.91. Closed Friday at C$32.73, US$31.74.

Recession or not, our passion for coffee and doughnuts hasn’t diminished. In fact, we’re buying more than ever judging by the terrific year-end results from Tim Hortons. The company reported fourth quarter net income of $91 million (51c a share, fully diluted), a 32% improvement from the profit of $69.1 million (38c a share) for the same period in 2008. For the full fiscal year, Tim Hortons earned $296.4 million ($1.64 a share) compared to $284.7 million ($1.55 a share) in 2008. Same-store sales for 2009 increased by 2.9% in Canada and 3.2% in the U.S.

“Our focus on being relevant to our customers and responding to their needs continues to position Tim Hortons among the leaders in the North American restaurant sector,” said CEO Don Schroeder. ‘Our record revenue and earnings performance in 2009 once again demonstrated the resiliency of our brand in difficult economic circumstances and we were pleased with the ability of our system to continue to successfully grow in challenging times.”

The company celebrated by passing on some of the goodies to shareholders. The target dividend payout range was increased to 30% to 35% of prior year normalized annual net earnings and the quarterly dividend is being raised by 30% to 13c a share (52c a year). The next dividend payment, due March 23, will reflect the higher rate. The company also announced a $200 million share buyback program for up to 5% of the stock.

Perhaps anticipating that the higher dividend and buyback program will divert money from future growth, CFO Cynthia Devine assured analysts and investors that the company can have its doughnuts and eat them too.

“Our confidence in future growth and proven capacity to generate strong free cash flow positions us well to continue our number one priority of funding our business growth investment needs while still returning value to shareholders in the form of increased dividends and a new share repurchase program,” she said.

As if to underline this point, the company said on Friday it plans to open 900 new stores over the next three years of which two-thirds will be in Canada.

Despite all this good news, the share price showed little movement after the results came out. However, we have done well with the stock since it was recommended in July 2009. The Canadian dollar price is up 13.3% since then while the U.S. dollar value is ahead by 22.5%, boosted by the increase in the value of the loonie.

Action now: Buy.

RioCan REIT (TSX: REI.UN, OTC: RIOCF)

Originally recommended on April 20/98 (IWB #9814) at C$10.90. Closed Friday at C$18.86, US$18.35.

These are not good times for Canada’s largest real estate investment trust (REIT). In fact, CEO Edward Sonshine went so far as to describe 2009 as “a very difficult year”. In corporate-speak that translates roughly as “it stunk”.

RioCan reported net earnings for the fourth quarter of the 2009 fiscal year of $28 million (11c per unit), down from $29 million (14c per unit) for the same period in 2008. Net earnings for the full year were $114 million (49c per unit) compared to $145 million (67c per unit) for 2008. The company said that primary factors for the profit decline were $35 million drop in gains from properties held for resale, a $25 million increase in interest expense, and a $10 million increase in amortization expense.

Funds from operations (FFO) were also way down. For the fourth quarter, FFO was $66 million (28c per unit) compared to $87 million (39c per unit) in the fourth quarter of 2008. For the full year, FFO came in at $276 million ($1.20 per unit) compared to $324 million ($1.48 per unit) in 2008.

This is especially significant because RioCan is currently paying monthly distributions of 11.5c a unit or $1.38 a year. This means it paid out more in distributions in fiscal 2009 than it generated in FFO. As a result, no distribution increase has been announced for 2010 and in fact there is some speculation that the REIT might have to cut its payments. That seems unlikely given that RioCan has cash reserves of $147 million and a payout cut would have a severe impact on the share price. However, it appears that the REIT’s record of 11 consecutive years of distribution increases may be at an end.

Mr. Sonshine tried to put a positive spin on the news, saying that the trust “has been able to set in place a strong platform for future growth in order to take advantage of opportunities as the economy continues to recover.” He went on: “Our conservative approach in 2009 resulted in a short-term drag on our profitability, but has enabled RioCan to take advantage of acquisition opportunities in the fourth quarter and set the stage for material growth in FFO going forward.”

RioCan is venturing into the U.S. for the first time, looking for bargains in what is seen as a distressed market. The trust recently took a 14.3% position in Cedar Shopping Centers, Inc. (NYSE: CDR) which focuses on supermarket-anchored shopping centres and drug store-anchored convenience centres located predominantly in the North-eastern United States.

I am reducing my rating on the shares to Hold until such time as we see improvement in the financials.

Action now: Hold.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)

Originally recommended on April 7/97 (IWB #9713) at C$6.13 (split-adjusted). Closed Friday at C$25.16, US$24.43.

Brookfield released fourth-quarter and year-end 2009 results recently and although the numbers were down on a year-over-year basis, they beat analysts’ expectations and gave a boost to the share price.

The company reported net income of $454 million (71c per share) for 2009 compared to $649 million ($1.02 per share) in 2008 (Brookfield reports its results in U.S. dollars). Net income in 2008 reflected a large non-cash tax recovery arising from an increase in the value of our tax assets.

Cash flow from operations for the fourth quarter increased to $381 million (63c per share) from $247 million (41c per share) compared to the same period in 2008, a 54% increase. For the full year, cash flow from operations was $1.45 billion ($2.43 per share) compared with $2.33 per share reported in 2008.

“Our renewable power and office property businesses generated strong operating cash flows during the quarter and throughout the year,” commented CEO Bruce Flatt. “The stable revenue profiles of these businesses provide us with a strong earnings base in order to continue to pursue investment opportunities at this exceptional point in the market cycle. Furthermore, the substantial amount of capital deployed by us in the last year sets the stage for continued asset value growth in the future.”

In fact, cash-rich Brookfield has been aggressively pursuing opportunities in the U.S. shopping mall area, where many companies are struggling under huge debt loads. On Feb. 24, the company announced an agreement in principle to take a 30% interest in General Growth Properties (GGP), investing $2.625 billion. GGP owns more than 200 regional shopping malls in 44 states and is the second-largest mall operator in the U.S. GGP sought Chapter 11 bankruptcy protection in April 2009 after failing to refinance portions of its $27 billion debt as they came due. It was the biggest real estate bankruptcy in U.S. history.

Watch for more moves of this kind in the coming months as Brookfield seeks to capitalize on what may be a once-in-a-lifetime opportunity to snap up quality properties at cheap prices.

Action now: Buy.


QUICK TAKES

This week we are introducing a new feature called Quick Takes. It will feature short items on a range of topics we believe will be of interest to members. Some of these will relate to securities on our Recommended List. These will not replace our regular detailed updates but rather will serve to provide supplemental information in a timely manner. Here are this week’s notes.

RBC high on Freeport McMoRan. On Wednesday, RBC Capital Markets issued a glowing report on international mining company Freeport McMoRan (NYSE: FCX), focusing particularly on Freeport’s copper and molybdenum operations. The brokerage firm raised its target price on the stock to US$95, saying that it expects to see growth of 47% in earnings per share and 39% in cash flow per share through 2013. RBC said the company’s strong balance sheet and free cash flow “should support special dividends and share buybacks” starting in the second half of this year. The stock was recommended by Glenn Rogers on Feb. 15 (IWB #10107) at US$73.68. It closed on Friday at US$80.71.

Thomson Reuters raises dividend. This New York-based communications company with Canadian roots, which trades under the symbol TRI, recently announced a modest dividend increase of 1c per quarter. That brings the annual payout to US$1.16 a share. The shares were recommended by Tom Slee on April 13/09 (IWB #2914) at C$33.58, US$27.59. They closed on Friday at C$36.49, US$35.41.

SNC-Lavalin dividend up. We received another dividend increase on one of our recommended stocks on Friday when SNC-Lavalin (TSX: SNC) announced a 13% hike, bringing its quarterly payment to 17c a share. This is another Tom Slee pick dating from May 8/06 (IWB #2618) when he advised buying at $32.45. The shares closed on Friday at $52.35.

 

YOUR QUESTIONS

More on asset allocation

Q – I am reviewing an asset allocation strategy where there are five to seven types of assets used for a portfolio. One of them is infrastructure. What do they mean by this and how would a self-directed investor apply funds in this area? – Kent N.

A – There are a variety of definitions for “infrastructure” but the word is generally understood to refer to the underlying physical structures of a society such as roads, bridges, sewers, utilities, pipelines, airports, etc. The TSX does not have an infrastructure sub-index although there are several stocks on our Recommended List that would qualify such as construction and engineering firms like SNC-Lavalin, Canam Group, Stantec, and pipeline companies like Enbridge and TransCanada.

Claymore Investments offers a Global Infrastructure ETF which includes several large Canadian companies. About 21% of the portfolio is invested in Canada with 44% in the U.S. and the rest scattered around the world. It trades under the symbol CIF. There are also a handful of mutual funds that focus on infrastructure but most have a very short history.

Depending on how much money you wish to allocate to this sector, you could purchase individual stocks from among those on our Recommended List or you could go with a mutual fund or the Claymore ETF. – G.P.

Retirement portfolio

Q – I just read the current issue of Internet Wealth Builder (Feb. 22). As a retired person, I like this retirement portfolio mentioned in this issue with an asset mix of 35% equities and 65% fixed-income securities. Only I need more advice. In the case of an investment of $100,000, all in mutual funds, what funds are recommended to own now to have this 35%-65% portfolio? Pease offer some of your valuable suggestions. Many thanks. – S.L.

A – We offer a model RRIF portfolio in our companion newsletter, Mutual Funds/ETFs Update. It was launched on Jan. 1, 2009 with a cost base of $25,000. We track it on a regular basis and published the one-year update in the February issue which showed the portfolio gained 13.7% in 2009.

The asset mix comes close to the 35%-65% formula but is slightly more conservative. The updated recommendations published in February have 50% of the portfolio invested in money market and bond funds. The BMO Guardian Monthly Dividend Fund is given a 10% weighting. At least half its assets are in preferred shares, thus adding another 5% to the overall fixed-income weight in the portfolio.

There are two balanced funds in the mix, each representing 15% of the total. Mackenzie Sentinel Income Fund is required to hold at least 60% of its assets in bonds, cash, etc., thereby adding 9% to the portfolio’s overall fixed-income weighting. Fidelity Monthly Income Fund has a 30% bonds/cash weighting at present, adding another 4.5% to the fixed-income component. That gives a total portfolio weighting of 31.5% equities and 68.5% fixed-income.

Here is the latest RRIF portfolio, as published in the February Mutual Funds/ETFs Update.

REVISED RRIF PORTFOLIO

Fund Name
Weight
PH&N Canadian Money Market
5%
PH&N Short Term Bond and Mortgage
15%
Beutel Goodman Income
15%
iShares CDN Corporate Bond Index
15%
Mackenzie Sentinel Income B
15%
GGOF Monthly Dividend Classic
10%
Fidelity Monthly Income
15%
iShares CDN REIT Sector Index
10%
Totals
100%

We review the model portfolios every six months in the newsletter. – G.P.

Looking for 5%

Q – I have been a subscriber to IWB since it began many years ago. Your letter and your recommendations have been of great help to my wife and me to build a RRSP for our retirement.
 
My wife is already 65 and she is receiving OAS. I will begin to receive it two months from now. Our house is paid for and we have no debt. We will each receive a $350 monthly payment from the Quebec Pension Plan. Finally, we have an RRSP totalling $800,000.
 
We estimate that we can get by yearly with $60,000. In other words, if we could secure a 5% return from our RRSP, we would be fine. What would you suggest as a safe way to get this kind of return in the years ahead? Thank your very much for your help and advice. – André B.

A – I can’t provide individual counselling but the sample RRIF portfolio above may be a helpful place to start. In your case, most of the RRSP assets (65% to 70%) should be invested in high-grade fixed-income securities or funds. A 5% return should be quite achievable without undue risk. You may wish to consult a fee-for-service financial planner for specific recommendations. – G.P.


MEMBERS’ CORNER

TFSA puzzler

Member comment: I read with great interest your recent column on TFSAs indicating Mackenzie Financial had discovered that Canadians don’t know much about Tax-Free Savings Accounts. In this regard I would like to offer one more question: “Which Canadians are NOT eligible to have a TSFA?”
 
Answer: “Canadians who do not reside in Canada”.
 
In my case I am a non-resident, however the CRA classifies me as a “Deemed Resident for Tax Purposes”. As a consequence I pay my Canadian income taxes each year and have no problem with that. However, due to my status as a non-resident, I am not allowed to have a TFSA. If I recall correctly one must reside in Canada for more than six months in order to qualify for a TFSA. As a retiree I reside outside Canada to avoid the winter weather and I do not have the resources to own a home in Canada and also in my current country of residence. Hence I spend nearly all my time outside Canada. 
 
I consider not being allowed to have a TSFA a very unfortunate and unfair regulation since I an subject to all of the obligations of a Canadian taxpayer, yet Revenue Canada chooses to disqualify me (and of course others in similar situations) from a simple and attractive benefit such as the TFSA.   
 
I would be interested in knowing whether anyone else has raised this issue.
 
Also I wonder if I were to return to Canada at some time in the future as a full time resident, if I would be able to open a TSFA at that time and make retroactive contributions back to the 2009 calendar year. – Edgar D.
 
Response: To be precise, the Department of Finance sets the rules, not the Canada Revenue Agency. It just administers them. You are correct that non-residents cannot open a TFSA nor do they accrue any contribution room if they return at a later time. There are important legal distinctions between “factual residents” and “deemed residents”. They are too complex to go into here but if you want more information consult the CRA Interpretation Bulletin IT-221R3 which can be downloaded at http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf – G.P.

 

That’s all for now. We’ll be back on March 15.

Best regards,

Gordon Pape
gordon.pape@buildingwealth.ca
Circulation matters: customer.service@buildingwealth.ca

All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. None of the content in this newsletter is intended to be, nor should be interpreted as, an invitation to buy or sell securities. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers, contributors, and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. The staff of and contributors to the Internet Wealth Builder may hold positions in securities mentioned in this newsletter, either personally or through managed accounts. No compensation for recommending particular securities, services, or financial advisors is solicited or accepted.