Canadian Interest

The Penny, Not the Cent will be Gone

April 2, 2012

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There appears to be quite a bit of confusion surrounding the announcement made in Budget 2012 that the penny would be eliminated from our coinage system. Some Canadians believe that by eliminating the penny, businesses would always round up the cost of individual items and hence drive up prices. That is not quite true.

The Federal Government is simply going to stop producing and distributing pennies as of Fall 2012. Existing pennies will remain in circulation but over time, as the supply of pennies diminishes, businesses will resort to rounding off on cash transactions. Here’s an example: You walk into a dollar store and purchase an item selling for $1.25. Add 13% HST and the final tally is $1.4125. If you are paying cash, the store will round down the price to $1.40. Another customer buying 11 items and paying cash will be charged $15.55 ($15.5375 rounded up), not $15.95 ($1.4125 rounded up to $1.45 * 11). There is already many good examples of this principle at work such as gas prices, which often have a lowest unit of a tenth of a cent.

The eventual elimination of the penny will have no effect on credit, debit, cheque and electronic payments, where the cent will remain the smallest pricing unit. And even if every single retailer refuses to play ball and opts to round up the total final cost to the nearest nickel, it is a cost well worth paying for the hassle of dealing with those pesky pennies.

Budget 2012: Changes to Old Age Security

March 29, 2012

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The increase in the age of eligibility of the Old Age Security program in Budget 2012 was widely telegraphed in advance but there were still a few surprises. Here are the other major initiatives introduced by Finance Minister Jim Flaherty in Budget 2012:

Travellers’ Exemptions Increased

The travellers’ exemption is a dollar limit that Canadian residents can bring back after a trip abroad without having to pay customs duties or sales taxes. Budget 2012 proposes that the Travellers’ Exemption limits will increase to $200 for an absence of more than 24 hours (current limit: $50), $800 for an absence of more than 48 hours (current limit: $400) and $800 for an absence of more than 7 days (current limit: $750).

Increase in Old Age Security Age of Eligibility

Starting in April 2023, the age of eligibility for OAS and GIS will be gradually increased from 65 to 67. In other words, Canadians who were born on or after Feb. 1, 1962 can expect to receive OAS benefits at age 67. The age of eligibility will gradually rise for Canadians who were born between April 1, 1958 and January 31, 1962. The OAS age of eligibility remains unchanged for Canadians born before March 31, 1958.

New Option to defer Old Age Security

Budget 2012 proposes that starting on July 1, 2013, Canadians can opt for a voluntary deferral of OAS for up to 5 years and receive an actuarially adjusted higher pension. Here’s an example provided in the Budget document:

Rita will be turning 65 in December 2013. She plans to continue working as long as she can. She prefers to forgo her OAS pension for the maximum deferral period of five years so that she can have a substantially higher annual pension amount, starting at age 70. When she takes up her OAS pension at age 70, her annual pension will be $8,814 instead of $6,481 (in 2012 dollars).

Eliminating the penny

As of Fall 2012, the Government will no longer distribute pennies. Good riddance!

Workforce adjustments

The Federal Government is planning to reduce its headcount by 19,200 over a three-year period, a number that includes attrition. Most of the job reductions will occur in the National Capital Region.

Adjustments to Public Sector Pension Plans

The Government is proposing that public sector employees contribute 50 percent to their pension plans over time (IIRC, the current employee contribution target is 40 percent). Starting in 2013, employees joining the public service will see the age of retirement raised from 60 to 65.

Other changes that maybe of interest in the Budget include protection of long-term disability plans and improvements in the registered disability savings plan.

Vanguard’s Wishy Washy Take on Active Management

June 6, 2011

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US Mutual Fund giant Vanguard announced today that it is setting up shop in Canada and will announce its product line-up once it has submitted a preliminary prospectus with regulators. Vanguard’s reference to providing “sound solutions for Canadian advisors and their clients” suggests that its initial focus will be on the advisor channel. As most Canadians invest through the advisor channel where costs can be as high as 2.5 percent, it is a logical place to start. If Vanguard succeeds in driving down costs, it will make a meaningful difference for those Canadians investing through an advisor. DIY investors will have their own ideas of what Vanguard should do: my own wishlist includes a cheap REIT fund and currency unhedged US Total Market and MSCI EAFE index funds.

Oddly for a fund company that pioneered index investing, Vanguard’s website offers up a report that unsuccessfully attempts to make a case for both active management and indexing in a portfolio:

There is a strong argument in favour of combining the two approaches: Adding indexing to active-oriented portfolios can reduce costs significantly and can help temper risk as well. While a blended approach is likely to reduce the performance peaks, it is also likely to reduce the performance valleys, when investors are most at risk of exiting the market in unfavourable conditions. A combined strategy can help avoid the pangs of regret that your clients might otherwise experience when one approach trumps the other.

It’s not clear how one can avoid “the pangs of regret” since very few funds manage to beat the humble index fund in most time periods and it is nearly impossible to pick the winning fund in advance.

Other takes (mostly speculation at this point) on Vanguard coming to Canada:
Jon Chevreau says Vanguard will be introducing ETFs.
Money Smarts Blog on what he expects Vanguard to do.