April 6th, 2015

Canada is certainly in a tough patch now, with both Energy and Materials out of favour.

Bank of Canada Governor Stephen Poloz unexpectedly lowered interest rates by 25 bps in January, to try and get ahead of our slowing economy.  He hasn’t lowered them again because he says he needs more time to evaluate how the economy is doing.

The Canadian dollar now seems to be regularly below .80 cents U.S., which is good for our exports, tough for imports, and makes vacationing in the U.S. much more expensive.  I don’t think the low dollar and lower interest rates are going to be enough to offset the losses to our economy from the plunge in Oil prices and the significant loss of jobs and capital spending.  GDP and Inflation are likely going to be benign in the foreseeable future.

10 year Government of Canada Bonds are yielding under 1.5%, while Province of Ontario 10 years are in the low 2% range.  Given that interest on bonds is taxable, their real return after tax and inflation is either close to zero or negative.  Tough environment for Fixed Income Investors as well.

Our focus of investing in Income Paying Securities (other than Bonds) continues to reward us with high single digit returns on an annual basis.  The goal is to earn a yield/distribution/dividend in the range of 4% to 6% annually, and a capital gain in the range of 3% to 5% per year giving us a total annual return in the range of 8%.

Boring but effective, and we don’t lie awake at night worrying.

We have also benefitted by adding U.S. Income paying securities into our Portfolios.

I had the privilege of being in Florida in January, and played golf with a friend of mine from Toronto.  His name is Greg, and he is in the business of owning  apartment buildings.  His father started the business, and Greg is now training one of his sons to take it over.  Greg talked at length about the great opportunity he now had to expand his business.  He arranged to borrow $20 Million on a fixed term of 10 years at an interest rate of just over 3% per year.  Using this 3% money, he is able to buy additional apartment buildings without using any of his own cash, and be instantly cash flow positive.  Proving the adage:  “The rich get richer!”

We can help you with ideas about how to use this strategy on a smaller scale.  Call if you are interested.

Bad day! 

Last week I spent a day and a half with “The Royal Canadian Dragoons” at Canadian Forces Base Petawawa, in preparation for a Charitable Fund Raising Campaign I am organizing for their benefit:  “Operation Guardian Force”

While there and talking to soldiers, they used an expression often:  “That was a bad day”.  They were referring to days in Afghanistan, when someone was killed or injured.

It put things into perspective for me as when I use the phrase “it was a bad day” normally means the markets were bad, my portfolio is down, my wife is upset with me, or the dog had an accident.

I shared this story with another friend of mine who is 55 years old, and now being treated with chemotherapy, following an aggressive bout of radiation treatments.  His perspective on a bad day is once again quite different than mine.

Reasons for sharing this is to remind myself/us how lucky we are to live in Canada and enjoy the Blessings and Privileges we do.

Investment Scenario:

You have $100,000 cash in a bank account, earning zero or close to it.
You would like income from this cash, but in a tax efficient manner.



This is a product offered by CI Investments.  The $100,000 is invested, and every year the investor receives $5,000 income, and this income is paid for 20 years.  No tax on the $5,000 as it is treated as 100% Return of Capital.

The money is invested in a Pension Plan format with 70% in Equities and 30% in Bonds with an annual target rate of return of 5%.

Ideally in this scenario, the portfolio earns 5% per year, the investor is paid 5% per year and after 20 years the Investor receives his original $100,000 back.

Bank of Montreal guarantees the annual income.

TD Dividend Growth Fund, T-8 version:

$100,000 is invested, and Investor receives $8,000 annual income.  $6,000 of this income is treated as Return of Capital so there is no tax (deferred).  $2,000 is treated as Eligible Canadian Dividends and approximately $500 is owing in tax.

Every December the annual income is reset based on the Net Asset Value of the Fund.  For example, if the NAV on original investment was $10 per unit, the annual income would be .80 cents per unit.  If after one year, the NAV dropped to $9 per unit, the annual income in the following year would be reduced to .72 cents per unit.  If the NAV increased to $11 per unit, annual income would be increased to .88 cents per unit.

Strange but True

A friend of mine had a lump on his neck, went to the Doctor and after several visits and tests my friend was told he had Thyroid Cancer.  A biopsy and an operation followed.  My friend gave the Doctor a “high five”.  Doctor said this was a most bizarre reaction to such bad news.

My friend informed the Doctor that he had purchased “Critical Illness Insurance”, and after surviving diagnosis by 30 days, he would receive $500,000 tax free.

My friend plans on using the proceeds of the insurance payout to help his youngest daughter with a down payment on a house, invest money in his business, and will have some money left over.

If you have any interest in learning more about this type of insurance, please give me a call.  As a heads up, it is expensive and hard to qualify for.

My friend is back at work and feeling well.

Final True Story

Client is looking for a new house and thinks he should downsize because all his children have moved out.  His wife has a different idea, and they end up buying a bigger house than the old one.  Client is in the fortunate position to be able to pay cash for the new, bigger house.

After closing, he and his wife agree to put a mortgage on the new house and they take a variable rate mortgage at 2.15% per year.  They invest the money in a portfolio with an annual target rate of return of 8% per year.  Also, they organize to receive a 3% annual income distribution from the portfolio.  The client will add an amount equal to the 3% from his own income and these funds will be used to pay down the mortgage.

Since the money being borrowed is for the purpose of earning income, the interest on the mortgage is tax deductible.

If you have interest in any of the ideas discussed in this letter, or have any other questions or topics you would like to review please give me a call or send me an email.

Thank you for the privilege of helping you with your Investments and Financial Planning.


Sincerely yours,


Fred Banwell