Advantaged ETFs refers to exchange-traded products that use derivatives such as forward agreements to transform one form of distributions (often interest income) into another (such as capital gains or return of capital) that is lightly, if at all, taxed. For example, an investor holding the iShares Advantaged Canadian Bond Index Fund (TSX: CAB) in a taxable account will have received capital gains and return of capital equal to the income generated from a portfolio of Canadian Government and corporate bonds (less fees and expenses). Capital gains are taxed at half the marginal rate. If the investor had instead directly held the portfolio of bonds, the interest income would have been taxed at the investor’s marginal rate.

Budget 2013 proposes to put a kibosh on what it calls “character conversion transactions” such as the ones employed by Advantaged ETFs.

Character conversion transactions link a derivative investment with the purchase or sale of an otherwise unrelated capital property to form a derivative forward agreement. If the derivative investment were made separately from the purchase or sale of the capital property (i.e., as a cash-settled derivative financial instrument), any income from the derivative investment would be taxed as ordinary income.

To ensure the appropriate tax treatment of the derivative-based return on a derivative forward agreement, Budget 2013 proposes to treat this return as being distinct from the disposition of a capital property that is purchased or sold under the derivative forward agreement. This measure will apply to derivative forward agreements that have a duration of more than 180 days. Whether a particular property is held on income or capital account is largely a factual determination and is unaffected by this measure.

ETFs Affected by the Change

iShares Canada put out a press release saying that seven funds in its ETF line up will be impacted by the changes proposed in the Budget. It is interesting to note that all these ETFs used to be traded under the Claymore brand name. They are:

iShares Advantaged Canadian Bond Index ETF (CAB)
iShares Advantaged Convertible Bond Index ETF (CVD)
iShares Advantaged U.S. High Yield Bond ETF (CHB)
iShares Advantaged Short Duration High Income ETF (CSD, CSD.U)
iShares Global Monthly Advantaged Dividend Index ETF (CYH)
iShares Broad Commodity Index ETF (CBR)
iShares Managed Futures Index ETF (CMF, CMF.A)

ETFs Not Affected by the Change

Horizons also put out a news release saying that the Budget proposals are not expected to impact the popular Horizons S&P/TSX 60 Index ETF (HXT) because the ETF makes no distributions and hence there is no re-characterization taking place. Horizons confirmed that the Horizons S&P 500 Index ETF (HXS) is also not expected to be affected by the move. Nevertheless, investors should weigh the risk of an adverse change in tax treatment of swap-based ETFs against the tax advantage of earning total returns.

See also: Canadian Financial DIY’s and Canadian Couch Potato’s takes on this topic.

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In a wide-ranging interview with Charlie Rose on PBS, Jeremy Grantham says that the era of 3 percent economic growth is over.

Jason Zweig says that automatic enrolment with opt-out can help alleviate the retirement savings crisis.

Rob Carrick says that you can give your kids their inheritance early by starting early and contributing regularly to a Registered Education Savings Account (RESP). It’s good advice because the Government kicks in at the very least an extra 20 percent.

Bitcoins were in the news this days as the value of these virtual coins soared in the wake of events in Cyprus. This blog post takes a deeper look into the strengths and weaknesses of Bitcoins.

As the old saw goes, investing is simple but not easy. This article offers ten tips for overcoming some common investment errors.

Larry Swedroe highlights the findings of a study that found that there is no special advantage to a strategy of investing in dividend-paying stocks.

Michael James calls value averaging — an investment strategy that involves adding or withdrawing money from a portfolio based on a pre-determined rate of return — “non sense”.

Canadian Financial Stuff says that he finds passive investing still means you have to pay attention to your portfolio. I tend to agree but it should be mentioned that the time demands of a passive portfolio are fairly minimal.

Google recently announced that it is shuttering the Reader product. Blessed by the Potato wonders why Google is killing off some of its useful products.

H&R Block Online Giveaway

Thanks to H&R Block, I am giving away five (5) online coupons for filing your family’s tax returns (valued at $23.95). To enter just leave a comment in this post and don’t forget to include a valid e-mail address. If you are reading this through your favourite RSS Reader or via-email, you have to click on the headline, get through to the website and scroll down to the bottom of the page and type in your comment.

Some quick rules:
(1) No purchase necessary. A skill-testing question may be required.
(2) Deadline for entries is 11:59 p.m. EDT on Tuesday, April 9, 2012.
(3) One entry per person please.
(4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win.
(5) I’ll pick five (5) entries at random and announce the winner after the deadline. All decisions are final.

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In Budget 2013, Finance Minister Jim Flaherty proposed the establishment of a risk management framework for systemically important banks. At first glance, the proposal looks fairly innocuous (See Pages 144-145 of the Budget document available here) because the Minister is simply proposing that the Government of Canada “intends to implement a comprehensive risk management framework” for the Big Six banks. The framework will include higher capital requirements, a “bail-in” regime that will convert “certain bank liabilities” into regulatory capital and more oversight from regulators.

Many Canadians (aided and abetted by certain vested interests) began to conclude that the Canadian Government is calling for insured bank deposits to take a haircut in the event of a major bank failure. That does not appear to be the case. Bail-in simply refers to a partial conversion of certain unsecured debt into equity under specific conditions. A 2011 paper titled Contingent Capital and Bail-In Debt: Tools for Bank Resolution put out by the Bank of Canada has some ideas on the liabilities that can be converted into equity [emphasis mine]:

There is some debate about the scope of the liabilities that should be subject to such bail-in conversion, but a focus on senior, unsecured debt instruments would be relatively straightforward. This particular scope of application would leave secured creditors, insurable depositors, short-term securities holders and a bank’s counterparties unaffected by bail-in provisions.

In other words, deposits in a bank up to CDIC insurance limits will likely be safe during a bank failure. In fact, The Financial Post is now reporting that a Finance Ministry spokeswoman clarified that “the bail-in scenario described in the budget has nothing to do with depositors’ accounts and they will in no way be used here.”

One would think that a bail-in mechanism for banks is a good thing because recapitalizing too-big-to-fail institutions with tax payer money (a.k.a bail outs) while leaving bond, preferred-share and sometimes even equity investors with little or no losses will incentivize reckless risk taking. After all, who wouldn’t love to gorge on a free lunch if someone else gets a stomach ache?

UFile Giveaway

Thanks to UFile Online, I have ten (10) online coupons that are good for filing your family’s tax returns (valued at $24.95 plus tax) to giveaway. Entering is real simple — Just leave a comment in this post and don’t forget to include a valid e-mail address. If you are reading this through your favourite RSS Reader or via-email, you have to click on the headline, get through to the website and scroll down to the bottom of the page and type in your comment.

Some quick rules:
(1) No purchase necessary. A skill-testing question may be required.
(2) Deadline for entries is 11:59 p.m. EDT on Friday, April 5, 2012.
(3) One entry per person please.
(4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win.
(5) I’ll pick ten (10) entries at random and announce the winner after the deadline. All decisions are final.

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Federal Finance Minister Jim Flaherty tabled the Federal Budget in Parliament today. Unlike previous budgets, there is nothing concrete to report but there are some interesting measures that may impact your pocketbook.

Another Budget, Another Tax Credit

Budget 2013 introduces a new temporary tax credit called the First-time Donor’s Super Credit (FDSC). A first-time donor is an individual (or her spouse or common-law partner) who has not claimed the Charitable Donations Tax Credit (CDTC) or FDSC in any taxation year after 2007. The first-time donor will be allowed to claim a 25 percent tax credit on up to $1,000 of donations once in 2013 or a subsequent tax year before 2018.

Deduction for Safety Deposit Boxes Eliminated

Currently, tax payers are allowed to deduct expense incurred for renting a safety deposit box provided they use it to store and protect papers relating to the portfolio. These days most records are available in electronic form and the importance of paper copies is declining. Therefore, starting in Financial Year 2014, the cost renting safety deposit boxes cannot be deducted as a carrying charge on the income tax return.

Increase in Tax on Non-Eligible Dividends

A non-eligible dividend refers to income received from corporations that are not taxed at the general corporate rate (such as private, small business corporations). If all you receive are mostly dividends from Canadian public companies, this measure will not impact you.

Budget 2013 proposes to reduce the gross-up factor applicable to non-eligible dividends from 25 percent to 18 percent. The Dividend Tax Credit will change from 2/3 of the previous gross-up amount to 13/18 of the new gross-up. The combined effect of this measure will increase the personal tax rate on non-eligible dividends received from corporations. (Note: KPMG reported that the net result of this measure will increase the federal effective tax rate on non-eligible dividends to 21.22 percent from 19.58 percent).

Crackdown on Charitable Donation Tax Shelters

It appears that Budget 2013 is proposing measures that may turn out to be final nail in the coffin of Charitable Donation Tax Shelters. First, the Budget proposes to extend the reassessment period for a participant in a tax shelter by three years to six years. Second, the Budget permits CRA to collect 50 percent of the any tax, interest or penalties resulting from a reassessment of a participant in a tax shelter even if a notice of objection is filed.

Hasta La Vista to Labour-Sponsored Venture Capital Funds

Labour-Sponsored Venture Capital Funds have, in general, turned out to be a poor investment for Canadians. Therefore, it is heartening to see that Budget 2013 is proposing to eliminate the 15 percent Federal Tax Credit for investments of up to $5,000 in Labour-Sponsored Venture Capital Funds gradually by 2017.

There are other interesting measures in the Budget regarding reporting requirements for foreign assets that we will take a look at in future posts. Meanwhile, if you are looking for some bedtime reading, you can find the entire Budget 2013 document here.

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A couple of years back, frustrated with Bell’s pricey Internet service, we switched to Teksavvy (See post Goodbye Bell, Hello Teksavvy). Teksavvy still offers significant savings over Bell but my initial enthusiasm has cooled considerably. I’ll explain why in this post.

Teksavvy’s 6Mbps, 75 GB per month DSL Internet service costs $29.99 per month. We find that sufficient for our moderate usage, which includes bandwidth intensive activities such as watching movies over Netflix. A similar package, albeit one at a slightly slower speed and much lower bandwidth, at Bell (5Mbps, 20 GB per month) costs $43.95 month. There are other minor differences between the two. Teksavvy requires customers to purchase their own modem while Bell rents it to subscribers. Also, it should be pointed out that Bell offers a discount for bundling with other services and might knock down the rate even more for some customers for a limited time.

At first glance, Teksavvy appears to offer a better Internet package at a significantly lower price but there is a catch. Teksavvy is essentially a reseller for Bell Canada, which owns and operates the telephone wires running to your home and charges a fee for doing so at a price set by the Canadian Radio-Television and Telecommunications Commission (CRTC). Therefore, when a Teksavvy customer orders a new service or a change to an existing service or reports a problem, the service order is often routed through to Bell Canada. Bell Canada, which offers its own suite of competing products, now has every incentive to be less responsive to the needs of a competitor’s customer compared to its own.

A case in point: last year, we moved to a new residence and called Rogers, Bell and Teksavvy to move our cable, phone and Internet services respectively. Rogers and Bell sent technicians to perform the move within 1 business day and followed up to check whether the service was up and running. Teksavvy said that it would move the Internet service one week later. And when the next week rolled around, Teksavvy could not complete the move saying that Bell claimed the phone service was still at the old address even though I had put in a move request to Teksavvy *after* moving the phone service and the move will be delayed one further week. We did get Internet service at the new residence the next week after a two week downtime and we have had no problems since. It turns out that my experience isn’t an isolated one. You can check out negative reports on Teksavvy on this forum but in fairness, it should be pointed out that positive reports far outweigh negative ones.

The bottom line: Teksavvy offers DSL Internet at a much cheaper price than Bell but you should be aware that if you run into problems, you may fall between the cracks because Teksavvy depends on Bell to fulfill its customers’ service orders.

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