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Tier One Winter Newsletter

Market Overview

Recently we sent out some comments on our market outlook accompanied by those of an economist and a Value Fund Manager. If you missed this please let us know - we will be glad to resend.

We remain frustrated with the market but that’s not new. As we look forward to the next few years we believe that a certain amount of one’s investment dollars could be well placed in “Real Asset” Funds (Gold, Real Estate, Real Return Bonds and some resources), as well as those businesses investing in infrastructure. The latter opinion flows from my belief that “North America needs to be rebuilt”. Bridges are developing structural problems, water pipes need to be replaced, the United States needs to re-string electrical wires and Ontario will, sooner or later, be smart enough to build another nuclear power plant. There are literally billions and billions of dollars that need to be invested in the substance that make our countries work. Companies that specialize in these areas can be expected to prosper. If you would like to read more on this please go to the attached and check out under the Specialty Fund section – Diversified Real Asset and Global Infrastructure.


Why Bob doesn't like RRSP's:

It is that time of year again when we are bombarded with RRSP ads and information. Statistics continue to be published regarding the high number of individuals who will, yet again, not take advantage of these “wonderful” programs. They are spoken of in glowing terms and made out to be the single best method of tax deduction and retirement savings. To disagree with this is to be against Motherhood and all else that is holy, but…

Truly - RRSP’s are quite simple. 18% of earned income (up to a maximum of $19,000) per year can be invested in a plan that will give a tax deduction in the year that it is made as well as defer tax for years to come. A great many choices are available to invest the money and the application process is straightforward. Loans are available at good rates for this year’s deduction, or to catch up from past years. The government even keeps track of your contributions and tells you on each year’s Notice of Assessment the amount that you can deposit during the following year.

I agree that people need to save and that the average client of ours will not reach their retirement goals if they keep doing what they are doing.

Points to consider:
Individuals with defined benefit pensions, (HOOPP, Teachers, OMERS etc.) should avoid RRSP’s. It is critical to have pools of Capital outside of registered plans to facilitate major purchases (car – trip) without the need to borrow or to pay the extra income tax on an additional RRSP withdrawal.

People expecting to have between $45,000 and $100,000 in RRSP’s by the time they retire should alter their current actions to avoid this region. Accomplishing this is easy – STOP making contributions or MELT DOWN existing savings prior to retirement. Smaller RRSP’s are useful to generate the $2,000per year of tax-free pension income. More income than this can actually prevent the receiving of other government benefits such as the Guaranteed Income Supplement.

Individuals who expect to have $600,000 or more in Registered Plans at retirement should also look at alternatives. In this country we are subject to age based discrimination in that seniors earning more than approximately $63,000 per year are subject to having their Old Age Security reduced. It translates to an additional tax of 15% and raises the top marginal rate from 42% to 57%. And earning over $103,000 in retirement will result in no OAS!


Universal Life: This is the insurance companies’ version of a tax shelter. Money grows tax sheltered and can be withdrawn without tax. A great variety of investment options are available. (This is Esther’s favourite retirement plan.)

Leverage: borrowing to invest allows the loan interest to be tax deductible. The money invested can grow without tax, using Corporate Class funds, and there is a preferable tax treatment (50% for Capital Gains) when the money is withdrawn.

In summary, I think you either have few RRSP’s or $600,000. My opinion is that it is good to diversify using a variety of strategies including leverage, Universal life and RRSP’s together.

And remember – the deadline is February 29th!

As we age there is a normally a much greater interest in income products and with that, a renewed focus on Guarantees.

Both CI Sunwise and Manulife have responded to this need with the creation of products that guarantee a minimum return for the life of the individual using CI and to age 85 with Manu.

Part A - a person 50 and over can deposit funds to this plan and have a capital guarantee and a minimum annualized rate of return of 5%. At the end of every 3 year period there is an adjustment. If the investments have done better than 5% the base amount increases to the actual gains and the next 3 year period begins with a new 5% guarantee. If the actual gain is less than 5% then the investor receives the 5% and the 3 year period begins. Very nice!

Part B- When an individual wants income, generally following retirement or to a maximum of 15 years from plan start, the fund starts to pay out 5% of the total accumulated. For example - if a person started at age 50 with $100,000 the minimum plan value would have grown to $175,000 by age 65. Every 3 years, until death, or age 85 for Manu, the plan performance will be assessed for over the 5% gain resulting in a potentially increased payout. Very secure! The negative is that this must be viewed as a long-term plan. Once you start, the only way to get all the benefits is to stay to the end.

If you need/want to do this we can and will help. I am absolutely a “bear” about making certain that people do not create long term debt for a short term issue. In this case the loan was for 10 years! How a planner could rationalize a 10-year loan for a deduction to be taken in one year is beyond me and a topic for another letter.

"Money House" Update

The “Money House” is my name for an alternative to a rental property – no maintenance or Landlord & Tenant Act to deal with. It involves borrowing a sum of money to buy investments, say $100,000, and allowing the monthly payout (distribution) to cover the borrowing costs. Over time, the capital will grow (certainly not in the last 6 months) and the individual will receive annual tax deductions from the cost of borrowing.

If you are using the Money House an annual cash flow checkup is important. Typically, in the first year we arrange for a payout that is equivalent to the interest cost. Last year that was between $6,500 and $6,750 per hundred thousand borrowed. On your 2007 taxes you will receive a deduction for this amount (cost of borrowing for investment purposes) and, depending on your tax bracket, you can expect to receive a tax refund of $2,500. By the way, please remember, that this refund is meant to be deposited against non-deductible debt as well!

Note: It would be beneficial to consider lowering your monthly income to the after tax amount, roughly 4%. In this way the loan can continue to pay for itself, on an after tax basis, and your capital will grow faster, roughly 2.5% per year faster. Please call to discuss and we will be happy to decrease the payout for you.

Asset Backed Commercial Paper - What is this anyway?

ABCP is actually the repackaging of the sub-prime mortgages (our definition – mortgages that people could not afford) from the US, with other less than good quality debt to make a new class of debt instrument that few of the buyers actually understood and may be the best illustration ever of the age old comment – “Not worth the paper that they are printed on.” Several US, Canadian and worldwide financial institutions have suggested that total write-offs may exceed $100B US. This has contributed to an overall decrease on the world stock markets. Issues to remember in these more emotional times are:

  1. Companies with no connection to sub-prime mortgages have been impacted.
  2. Poorly defined negative information drives emotion to sell overall rather simply punishing the effected companies.

And finally, on a more mercenary note, it is important to keep in mind the buying opportunities available. A devalued market is an ideal time to purchase – it is always better to buy low/sell high rather than the process followed by the crowd which generally results in BUYING HIGH and SELLING LOW.

What's in a name?

L’Eau Vivante (English translation Living Water) has been a name I have used for several years. Our clients and contacts have trouble spelling it, pronouncing it and relating it to financial planning. As we have grown it has become apparent that a name change is required. Our independent entities are now called TIER One Planning and soon for Esther’s business - TIER One Investments with Legacy Investment Management continuing for her back office.

Client Appreciation event

We wanted to give everyone notice - well in advance – that we are having a client appreciation event on Saturday May 31st. The event will be featuring a motivational comedy by Derrick Mueller. You can find more information on the performance through the following link: http://www.whenilookbackilaugh.com/home.html and we will be sending event information as it becomes available.