TriDelta Financial – Tax Efficiency

TriDelta Q3 2014 Investment Report – Keeping the faith when the news is bad

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October 6, 2014 Ted Rechtshaffen Dividends, Interest Rates, Investment performance, investment philosophy, Portfolio Management, tapering, Tax Efficiency, Volatility

Executive Summary

5186232_s1 Last quarter, our message was that Q3 is historically a positive quarter, but not as strong as Q1 and Q4. The message was also that we should expect to see our recent string of 1%+ monthly returns come to an end. Well it took until September, but it did indeed come to an end.

As the bad news from around the world seems to keep coming in, and people’s fears for the market escalate, TriDelta remains fairly confident in North American stock markets as we head into the fourth quarter. This isn’t because we are ‘fiddling while Rome is burning’. It is because:

corporate earnings remain strong
interest rates remain low (more on that further in our commentary)
the US economy is growing
you can buy BCE stock and get a 5.1% dividend that will grow every year or you can get a 5 year GIC at 2.5% that will not grow (and will get taxed more in a taxable account).

We recognize some of the challenges in the market and world, and are watching them closely but a big part of our job is to try to separate the meaningful information from the short term noise. For now, we believe that the meaningful information is telling us that stocks remain a better investment option than bonds or cash.

Two other notes on the month and quarter ahead. Only once in the past decade has a negative September been followed by a negative October on the Canadian and US stock markets. Of course, we all remember 2008 (sorry for reminding you).

As a final point, the broad US based S&P 500 has had a great run since March of 2009. However, within that run, the market has dropped 5%+ 11 different times, and each time has rebounded quite quickly and advanced further. As of this writing, for all of the noise, the S&P 500 still isn’t down 5% from its peak for a 12^th time. While the TSX and other areas of the world were down more, the point is that these pullbacks are very normal, and we believe this is one more of them.

The Quarter that Was

The quick summary is decent numbers for bonds, a little weak for stocks, very weak for emerging markets, metals and mining and smaller cap stocks.

After a drop of 4.3% on the TSX in September, Toronto stocks ended the quarter down 1.2%.

The DEX Bond Universe saw a loss of 0.6% in September, and a quarterly gain of 1.1%.

Preferred shares saw small quarterly gains in the 0.5% range.

Both the S&P500 (US) and the MSCI World Stock Index had losses in September, and had similar quarterly returns with small gains of 0.6% and 0.4% respectively.

Currencies played a role in the quarter with the US dollar appreciating strongly against most world currencies and also to the Canadian dollar. Greater exposure to US dollar investments helped Canadian investor returns on the month. For example, while the S&P 500 was down 1.4% last month in US dollars, it was in fact up 1.6% on a Canadian dollar basis – for a 3% swing on currency.

How did TriDelta Clients Do?

Fortunately, most TriDelta Financial clients had a decent quarter.

Conservative clients did very well – with most up 1.5% to 2.5% on the quarter.

Growth clients were a little weaker – most were flat to slightly down on the quarter.

The reason that conservative clients did better was two-fold. Bonds and preferred shares outperformed most sectors of the stock market for the quarter, but within the stock market, large cap, dividend payers (outside of metals and mining) had solid returns, and these are the types of stocks that TriDelta owns in our Pension style portfolios. Of course, owning Tim Horton’s in Pension portfolios also helped.

Even in September, as the TSX was down over 4%, most of our Conservative clients (who are up between 8% and 10% on the year to date), kept September returns to a loss of less than 1%.

Over the long run Growth clients should outperform, but so far in 2014, our Conservative clients have seen better returns.

TriDelta High Income Balanced Fund

Some clients who are accredited investors ($1 million+ in investment assets or $300,000+ in household income or $200,000+ in personal income), have been able to invest in the TriDelta High Income Balanced Fund. This pooled fund aims to deliver high yields, and broad diversification, through stocks, options, and low cost leverage of bonds. Year to date the fund has returned just under 10%, and has been in the top decile (top 10%) of all balanced income funds in Canada. In Q3, the fund was up 0.7%. We are very pleased with the performance of the fund so far this year.

Pending legislation changes may mean that the Fund could be available to all non-accredited investors soon. We will keep you posted as soon as this change comes into reality.

Positive Dividend Changes Continue

We continue to pay close attention to dividend growing stocks. We believe that this is a strong part of long term, lower volatile investment success. Again this quarter we are pleased to say that there were no dividend declines, and the list of seven dividend growers are as follows:

Company Name	% Dividend Increase	Company Name	% Dividend Increase
Home Capital	+12.5%	Emera	+6.9%
Conocophillips	+5.8%	Royal Bank	+5.6%
McDonalds	+4.9%	Verizon	+3.8%
Bank of Nova Scotia	+3.1%

The Quarter Ahead

We believe that interest rates are one of the biggest drivers of the market today, and the better handle we have on future interest rates, the better we will manage your overall portfolio. In summary, we believe that short term rates will rise in the US in late 2015, but only by a small amount. We believe that short term rates in Canada likely will track those of the U.S. – perhaps with some lag. We believe that long term rates in the US and Canada will remain fairly volatile, but could in fact move lower.

The basic message being that meaningful interest rate rises are unlikely to take place and that this helps guide our investments in two ways.

The first is that this will help the stock market as growth is encouraged by low borrowing costs.

The second is that long term bonds are a reasonable investment as well, and are not to be feared.

Here are 6 items driving our view of interest rates:

“Everyone” thinks interest rates are going higher, but the market seems to be telling us something different. This can most easily be seen in the 10 year bonds in virtually all Western countries that have seen meaningful declines in 2014 – most notably in Europe.
Yes it is true that Quantitative Easing will end by the end of this year, but US long term interest rates have actually fallen during most of the months that the US government has been reducing its bond buying. The noise about the end of Quantitative Easing has upset the market, but the reality is that long term interest rates may come down further from here. Don’t get caught up in the noise.
Short term rates in the US are going to rise in 2015 – but it will likely be so small that it won’t make much of a difference? Fed Funds Futures currently give a 75% chance that the first US rate hike will be around September 2015 (still almost a full year away). There is a 50% chance of a second hike of 25 basis points (0.25%) by the end of 2015. IF both happened it would move the US Fed Funds rate from 0.25% all the way to 0.75%. This would mean that in 12 to 15 months, the US Fed Funds rate will still likely be at close to historical lows.
Geopolitical risks (Russia, ISIS and Hong Kong) are providing a safe haven trade into bonds – especially in the US and Canada. This flood of funds into bonds is keeping interest rates low.
As the largest debtor nation in the world, the United States doesn’t want to have to pay more on their own debt. Just like you want your mortgage rate to be low, imagine how much a country with $18 trillion of debt would like to have low interest costs!
Household debt levels are significantly greater now than before the financial crisis. If the US Fed hikes rates prematurely, there is a risk of a recession.

Summary

While you don’t want to sift investment decisions down to a couple of numbers, we do feel that today, interest rates play a bigger predictor of future stock market returns than they have in a long time.

Fortunately for us, our view is that long term rates in particular, will be supportive of higher equity markets, particularly in the U.S., for the period ahead. Corporate earnings remain very important and have been largely positive of late, but we believe that low interest rates will also be key to continued earnings growth.

As an aside, investment markets tend to perform better from October to March than the 6 months that have just past. Let’s hope that trend continues.

May we all enjoy the beautiful fall colours that Canada provides, and remember to take time to be thankful for the good in our lives.

TriDelta Investment Management Committee

VP, Equities

VP, Fixed Income

President and CEO

Executive VP

VP, Wealth Advisor

1% in your pocket is better than 1% in the taxman’s pocket

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May 1, 2014 Ted Rechtshaffen capital gain tax, dividend tax, interest tax, Tax Efficiency, tax on investment

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We often tell clients that while you can’t always control investment returns, you can be tax smart in terms of how you invest. If you can add 1% after tax a year to whatever your investments happen to return, you will be much better off over time.

Very roughly, if you are in Ontario and in the tax bracket over $136,000 of income, you will lose almost half of your gains on GICs, bond interest, and U.S. stock dividends. If instead you bought a preferred share or Canadian stock that pays a dividend, you will lose about 30% to taxes. If your investment gains come from capital gains, you will lose a little less than a quarter to taxes.

TriDelta Investment Counsel – Q1 2014 investment review

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April 8, 2014 Ted Rechtshaffen Dividends, Interest Rates, Investment performance, investment philosophy, Portfolio Management, tapering, Tax Efficiency, Volatility

Executive Summary

After strong investment markets in 2013, there were some real questions about valuations heading into 2014.

At least for the beginning quarter of the year, we remained fully invested and leaned a little aggressively. This has paid off as the quarter was quite positive for stocks (more so for Canada than the US). Even bonds and preferred shares had a bit of a rebound, continuing some of their gains from the last quarter of 2013.

The question remains whether to take a little bit off the gas to defend against a potential pullback or to continue to move fully forward.

TriDelta Investment Counsel – Q4 2013 investment review

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January 20, 2014 Ted Rechtshaffen Dividends, Interest Rates, Investment performance, investment philosophy, Portfolio Management, tapering, Tax Efficiency, Volatility

Equities maintained strong upward momentum during the fourth quarter of 2013 completing an excellent year. The sustained & better than expected US economic reports, fueled a global market surge that surpassed our expectations.Virtually every major global equity market was up double digits for the year with a few notable exceptions including China and Brazil. Indications suggest that the global recovery following the major market shocks in 2007 & 2008 has taken hold. The recovery is being led by the US economy and is believed to be sustainable although will likely deliver its fair share of surprises as it unfolds further.Emerging market equity returns were slightly positive in the fourth quarter, but as a group recorded slightly negative returns for the year.

Precious metals remained under pressure throughout the quarter and were well down on the year. Gold investors recorded a negative 28.3% return.

Fixed income on the other hand showed signs of stress in light of the broad based US economic strength, exasperated by talks of the US Federal Reserve tapering. Most global bond indices were flat or slightly negative. The DEX Universe of Canadian bonds recorded its first negative return of -1.19% in well over a decade. Losses were driven by government issued debt and bonds with longer maturity dates while corporate bonds in aggregate returned 0.84% for the year.

The Bank of Canada remains concerned that inflation remains well below target, but is also troubled by record high consumer debt levels spurred by low interest rates. This dilemma suggests that they will likely remain neutral (in other words, not increase rates) for some time.

Despite the difficulty of double guessing the Bank of Canada, our opinion is that longer dated bond yields may rise albeit not for some time. Once Canadian rates move higher increases will likely remain within a tight range between 2.5% and 3%.

We reiterate that bonds have a key role to play as part of very necessary diversification as we build wealth. We also focus on capital preservation while delivering clients with a steady stream of predictable income. We forecast that our bond portfolios will deliver an approx. 3.5% return in 2014.

In 2013 our Core bond portfolio returned 3.68% and our Pension bond portfolio 1.66%, despite our benchmark DEX losing 1.19%.

US Fed policy remained the big discussion amongst market strategists who debated timing and the extent of QE tapering. December delivered the first decision to begin the easing process with a $10 billion monthly reduction of bond purchases from $85 to $75 billion starting in January 2014. The fear of tapering hindered 2013 bond performance, but we believe it is no longer a big issue and that bond markets have now priced in the effect of eliminating it entirely in 2014.

Despite the positive economic news including the IMF and World Bank forecasts of better global growth in 2014, caution is warranted, particularly after the steep market gains. Our ‘TriDelta 2014 Financial Forecast’ published in late December details our outlook for the year ahead.

How did we do?

2013 was another positive year for TriDelta clients. The Toronto Stock Exchange equity index (TSX) returned 7.3% in the fourth quarter and 13% for the year whilst the Canadian Corporate bond component of the DEX Universe Index was up 0.87% for the year while the overall DEX Universe was down 1.19%.

Most TriDelta clients had a net return for their portfolio between 6% and 16% depending on their risk tolerance/asset mix. Pure equity returns before fees were 22.45% for our Core portfolio and 18.41% for our Pension portfolio.

TriDelta Equity Model Returns in Canadian Dollars (to December 31, 2013):

TriDelta model	1 month	3 month	6 month	1 year (2013)
Core Equity	1.60%	6.64%	9.97%	22.45%
Pension Equity	-0.15%	7.44%	11.64%	18.41%

What worked well in Q4?

Sectors: Info Tech +15.7%, Industrials +16.8% & Health Care +13.8%

Core Model Stocks: Core – Constellation Software +24.5%, 3M +22%, Priceline +18.8%

Pension Model Stocks: Norfolk Southern + 24.8%, Abbvie +23%, Apple +22.3%

What did not work well in Q4?

One of our beliefs at TriDelta is to be very open about our business, its successes and its weaknesses. Openness is not a hallmark of the financial industry, but something that we believe is important in order to build trust, strong performance and partnership with our clients.

Sectors: Materials +0.8%, Utilities +4.7%

A few of our holdings had negative returns, some of which are listed below:

Core Model Stocks: Manitoba Tel -11.1%, S&P 500 Short -9.4%, Tourmaline -4.5%

Pension Model Stocks: Iamgold -13%, S&P 500 Short -9.4%, Cdn Oil Sands -.9%

The Best and Worst performers of 2013

Pension portfolio:

Company Name	Change
Abbvie	+68%
Norfolk Southern	+64%
Home Capital	+39%
Wajax	-12.7%
Iamgold	-12.9%
Potash	-15.2%

Core portfolio:

Company Name	Change
Priceline	+99.9%
Magna	+78.6%
3M	+64.8%
Marathon Petroleum	-15.2%
Barrick Gold	-17.0%
Coastal Energy	-17.7%

Dividend changes:

We strongly believe in the power of dividend growth and those companies who have a history of increasing their dividends over time. These companies have generally outperformed the market with lower volatility. This quarter was no exception and we were proud to own the following companies that increased their dividends:

Company Name	% Dividend Increase
Abbott Labs	57%
3M	34%
Atco Ltd	15%
Canadian Utilities	10%
National Bank	6%
McDonalds	5%
Merck	2%
TD Bank	1%

One company we owned removed their dividend entirely, which was a disappointment. It was Iamgold Corp

Summary

We’re proud to have protected and grown our client wealth in 2013.

We have also successfully delivered on our core beliefs of comprehensive financial planning, tax efficiency and an investment plan that generally lowers volatility, typically increases income and ensures we own many of the best companies as identified by our exclusive quantitative led selection process.

2013 is another example of our achieving above average risk adjusted returns in an extremely low interest rate environment. We remain committed to our proven investment approach and philosophy.

Thanks for your continued support.

TriDelta Investment Management Committee

VP, Equities

VP, Fixed Income

President and CEO

Executive VP

VP, Wealth Advisor

Ever Considered Loaning your Spouse Money?

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March 21, 2013 Brad Mol Income Splitting, spousal loan, Tax Efficiency, tax reduction

Here’s why you might.

We all look for ways to reduce the amount of tax we pay. Sometimes I come across situations where one spouse has accumulated a larger non-registered investment account than the other. This can happen over time when one spouse has a higher income than the other, or perhaps when one spouse receives an inheritance.

This often leads to higher taxes being paid by the household. In an effort to reduce taxes, income splitting strategies can help shift income from a high tax bracket family member to a low tax bracket family member.

This is not as simple as making a non-registered account ‘joint’ with a lower income spouse or minor child. CRA would consider this a gift to a non-arm’s-length person and attribution rules would apply, essentially attributing most if not all of the income back to the higher income individual and taxing it in their hands.

One income splitting strategy where attribution rules would not apply is to use a spousal loan.

A spousal loan works like this:

The higher tax bracket spouse (lender) loans funds to the lower tax bracket spouse (borrower) at the prescribed rate.
The prescribed rate is set quarterly and is based on the 90-day Treasury bill rate. Today that rate is at a historic low of only 1%!
The borrower must pay interest on the loan annually by January 30 of the following year ($1,000 for a $100,000 loan).
The investment income generated is taxed in the hands of the borrower, not the lender.
The interest paid on the loan can be deducted by the borrower and is taxed in the hands of the lender.
A written agreement should be put in place documenting the loan. This also locks in the rate of 1% for the life of the loan, regardless if the prescribed rate increases in the future.

couple To illustrate the potential benefits of this strategy, let’s look at a hypothetical couple Tom & Mary Connor.

Tom recently inherited $500,000 from his mother. Tom faces a marginal tax rate of 46.41% while his wife Mary’s marginal tax rate is 31.15%. Tom plans on investing the money and can earn 5%. For simplicity, let’s assume the 5% return is simple interest.

If Tom invests the funds himself, his after-tax return would be $13,397.

$500,000 x 5% x (1 – 46.41%) = $13,397.

Instead, Tom can lend Mary $500,000 at the prescribed rate of 1%, thereby shifting the growth on the money to Mary who is in a lower tax bracket while avoiding attribution rules.

Tom would include the $5,000 in interest on the loan as income, providing an after-tax return of $2,680.

Mary would include $20,000 in interest as income (5% return less 1% in interest costs), providing an after-tax return of $13,770

The total after-tax return for the household is $16,450.

The spousal loan strategy has provided an incremental family return of $3,053 after one year. As the portfolio grows and the resulting income from the portfolio increases, the incremental improvement in family return also increases.

This tax-planning strategy does however have potential non-tax consequences that should be considered:

You may be more likely to be reassessed by CRA.
Tax returns become a bit more complicated.
If the marriage breaks down, the situation will become more complex and will be subject to family law provisions.

Your entire financial situation, goals & objectives should be considered before employing any strategy. If you find yourself in a similar situation to Tom, a spousal loan may work very well, especially considering the historically low prescribed rate of 1% that can be locked in today.

Written by Brad Mol, Senior Wealth Advisor, TriDelta Financial

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TriDelta Q3 2014 Investment Report – Keeping the faith when the news is bad

1% in your pocket is better than 1% in the taxman’s pocket

TriDelta Investment Counsel – Q1 2014 investment review

TriDelta Investment Counsel – Q4 2013 investment review

Ever Considered Loaning your Spouse Money?