Income Trust distributions and taxes
windtur...@yahoo.ca
trying to get clear just what the story is with the taxes on
distributions from Canadian income trusts. Here's a quick overview of
what I've gleaned so far. I welcome comments and clarification.
Income trusts are sold through brokers much the same as common stocks,
with daily fluctuating market price, and subject to the same trading
commisions. Income trusts have ticker symbols ending in ".UN" such as
Yellow Pages Income Fund = YLO.UN, Canadian Apartment Properties REIT =
CAR.UN, and Canadian Natural Resources = CNQ.UN. This special business
structure allows a company to be exempt from most normal business
taxes; they distribute income to unit holders, and that income is taxed
in the hands of the unit holders -- i.e., you and I, on our personal
income tax returns. There are purported tax incentives for retail
investors to own them - more on this later.
Holding an income trust inside your RRSP lets the individual investor
defer personal income tax on the distributions from the trust. The
income can accumulate inside your RRSP, either as cash (which you can
re-invest elsewhere) or as additional units (and fractions) of that
same income trust, if the company offers this service (similar to a
"DRIP" or Dividend Re-Investment Plan offered by some dividend-paying
common stocks). A DRIP can be a nice way to "dollar cost average"
buying small additions to a position in an income trust each month -
you get new units at the current market price each month, letting you
get somewhat more units when the price has gone down lately. Over time
this can lower your average cost.
If you hold an income trust OUTside your RRSP, things get more complex.
The monthly distributions from an income trust become part of your
income for that year, and are subject to personal income tax. But not
just regular tax, oh no. Some of the distribution counts as dividends,
and as you likely remember, there was a big hoo-hah in October 2005
when liberal finance minister Ralph Goodale let slip that he was
considering changing the tax status of income trusts (which made many
of their unit prices tank), then he rushed to announce they would not
be fully taxable after all, but would benefit from an improved Dividend
Tax Credit. Whew! Trust unit prices rebounded, a near-scandal was
brewing about people who bought units at deep discounts just before
Goodale's announcement, yada yada. Now trust prices have bounced back,
shot up early in '06, then slid along with the rest of the market this
month.
But wait a minute: trust income is supposed to be affected by the
Dividend Tax Credit. So do trusts pay dividends, the same as blue-chip
stocks? Well, sort-of, but not exactly.
Each income trust you hold outside your RRSP should issue you a T3 slip
each year. (If you hold a bunch in a single investment account, your
bank may combine the totals one a single slip, if you are lucky.) The
slip shows the breakdown of how much of the distribution is to be
counted in three different boxes: dividends, "return of capital", and
"other income." You copy the amounts into your tax software, and it
does The Right Thing with them (we hope). Or if you are a Luddite, you
actually read the rules, do a whole lot of calculations in pencil, then
fill in the paper return with the Right Totals (you hope).
So how are the three parts of the distributions taxed? The dividend
part is real dividend income, just like a dividend from a common stock.
It gets multiplied by a fudge factor called "Gross-up", currently 1.45,
and that gets added to your gross income. Then the amount of the
dividend goes into another formula (aka "a blender") and out comes a
"dividend tax credit" amount that you can use as a non-refundable
credit. So in the end, you do pay some tax on the dividend amount, but
a lot less than you would on straight income. This gives us a reason to
hold dividend paying units and stocks outside the RRSP.
The "return of capital" part works like a little capital gain earned
that year, even though you didn't ask to sell any of the units. In
effect you enter a capital gain for that amount for that year, and the
gain must be factored in to your book value for the unit (what you paid
when you "bought low"). Later, perhaps years later, when you actually
do tell your brokerage to "sell (high)" the units, you may realize
another capital gain (or a loss that can offset other gains). That gain
(loss) is computed by taking the price you realize when selling the
units, minus your "Adusted Cost Base" or ACB for the units. The ACB has
been constantly changing over the life of your ownership, because the
returns of capital keep chipping away at your original book value. In
effect, the units cost you somewhat less than the original price,
because you got back part of the capital, bit by bit, as the trust paid
out some "return of capital" in their distributions. (If you had a
DRIP, I think the monthly purchases also keep fiddling the ACB value
... ouch)
The third box on the T3 slip is "other income." That is the simplest
(and least fun) box, since it is fully taxable income just like
interest on a bond or chequing account. Bah!
Well, at the end of all this, what I realised is the following:
a) Income trusts pay THREE kinds of income, each with different tax
implications
b) Computing the tax on these is nothing simple, especially the ACB.
Hope your broker keeps track for you, or else you'll be in Excel Hell
when you sell (poetry!)
c) Company can and often do alter the proportion of distributions
allocated to the three categories over time
d) The big shock to me was that a lot of trusts pay almost none of
their distribution as dividends. This is not obvious - I had to visit
the investor relations page of each company separately, and dig around.
Many post the current breakdown and past history, though some companies
do not seem to post this info at all. I found several paying 90-95%
"other income" (fully taxable) and 5-10% Return of Capital (taxable
capital gain, 50% inclusion, changes your ACB), with ZERO percent
dividend. Others have a dividend share of a small percentage. I have
not yet found any paying more than, say, 25% of their distribution as
dividends.
Given my discovery in (d), I have to conclude that the pain of holding
an income trust outside my RRSP is just too great. First there is too
much fully taxable "other income", and second the tracking of the ACB
sounds like a paperwork nightmare. I now intend to limit them to
holding inside my RRSP, so I can forget all the ACBs and shelter the
90+% fully taxable income. For my direct investments outside my RRSP I
will stick to common stocks that pay a plain, simple dividend outside
to get the full dividend tax credit. I only have to report a capital
gain when I actually sell the stock. A stock with a DRIP may have ACBs
to keep straight, but oh well.
I offer this as my small contribution to "tax planning for Confused
Canadians."
Okay, whew. Long post, thanks for your patience. Now finally my BIG
QUESTION:
If so many income trusts pay mostly "other income" (fully taxable) or
RoC, and zero or very little dividend, where is the vaunted tax benefit
to the retail investor? Eh!? The media made such a big deal out of the
Goodale Surprise, and income trusts rallied greatly. Yet I now find
many of them qualify for the Enhanced Dividend Tax Credit either barely
or not at all. Am I confused?
Greg Goss
>If so many income trusts pay mostly "other income" (fully taxable) or
>RoC, and zero or very little dividend, where is the vaunted tax benefit
>to the retail investor? Eh!? The media made such a big deal out of the
>Goodale Surprise, and income trusts rallied greatly. Yet I now find
>many of them qualify for the Enhanced Dividend Tax Credit either barely
>or not at all. Am I confused?
The tax benefit is not the confusing situation you encountered. The
real benefit is at the "corporate" level. You get a credit on
dividends because the corporation has already paid some taxes on that
money. An income trust gets the money out to you before it collects
any taxes, so you pay a higher rate on more money.
Case A
Corporation earns a bunch of money. Your share of that is $1000.
They pay $250 taxes and give you $750 in dividends. You pay $150 in
taxes and keep $600.
Case B
Trust earns a bunch of money. Your share of that is $1000. They pay
no taxes and send you $1000 in distributions. You pay $300 in taxes
and keep $700.
(I don't know the actual tax rates. Ignore the numbers other than as
an illustrative example).
By not paying taxes as a corporation, the trust has much more money to
hand out, even if you're going to have to pay more taxes on it.
I agree that the ACB is awkward. I'm a programmer, and have a
spreadsheet that tracks my ACB and I recently had to amend my taxes
because there was a flaw in my formula. ACB is a pain even on
ordinary stocks, and a real pain on the trusts. It's a pain I accept.
Most of my trusts are in my RRSP.
--
Tomorrow is today already.
Greg Goss, 1989-01-27
ztip guy
> The monthly distributions from an income trust become part of your
> income for that year, and are subject to personal income tax. But not
Only a portion of the montly distributions from income trusts are subject to
taxation. Most trusts include a component referred to as 'return of
capital', which is an annuitization of the booked paid-up capital of the
trust. In theory, this money passes back to the unitholder, "tax-free", and
represents depreciation of the plant and equipment of the trust.
Many highly knowledgeable individuals believe the income trust market is
irrational because the high yields they purport to pay, in many cases,
represent depletion of the underlying assets, and not legitimate returns
from those assets. I tend to agree.
> just regular tax, oh no. Some of the distribution counts as dividends,
> and as you likely remember, there was a big hoo-hah in October 2005
And some as return of capital.
> when liberal finance minister Ralph Goodale let slip that he was
> considering changing the tax status of income trusts (which made many
> of their unit prices tank), then he rushed to announce they would not
> be fully taxable after all, but would benefit from an improved Dividend
> Tax Credit. Whew! Trust unit prices rebounded, a near-scandal was
> brewing about people who bought units at deep discounts just before
> Goodale's announcement, yada yada. Now trust prices have bounced back,
> shot up early in '06, then slid along with the rest of the market this
> month.
Surprisingly, trusts have performed during the most recent correction. I
still believe the market is irrational and primed for poor performance over
the next number of years, especially with rising debt levels. Also, capex
expenditure and maintenance can only be deferred for so long. And the
accounting for 'distributable cash' is questionable.
Much of the poor performance has been covered up by the fact that we have
been in a very strong bull market combined with low interest rates. When
the market softens, and interest rates rise further than they are today,
especially on medium term debt, the sector definitely could be in a lot of
trouble.
> The "return of capital" part works like a little capital gain earned
> that year, even though you didn't ask to sell any of the units. In
The capital being returned is the initial investment capital in the
enterprise. Do not confuse what you actually paid for the trust, with the
trusts's 'book value', on which, return of capital is calculated by the
trusts's accountants.
Every business enterprise has a certain level of paid-up capital. When that
capital is reduced, that is known as 'return of capital'.
> effect you enter a capital gain for that amount for that year, and the
No. You don't enter anything on your tax return for return of capital,
*unless* your adjusted cost base is less than zero, then you have to claim
it as a capital gain. But you are correct, you do reduce the book value of
your holding accordingly (unless you have claimed it as a capital gain, in
which case, your book value is $0 anyways).
> gain must be factored in to your book value for the unit (what you paid
> when you "bought low"). Later, perhaps years later, when you actually
> do tell your brokerage to "sell (high)" the units, you may realize
> another capital gain (or a loss that can offset other gains). That gain
More than likely a loss if you hold long enough. Most trusts are structured
to be worth nothing if you hold them long enough. Thats why I say,
"annuitization of capital" when i refer to the phenomena of 'return of
capital'.
> (loss) is computed by taking the price you realize when selling the
> units, minus your "Adusted Cost Base" or ACB for the units. The ACB has
> been constantly changing over the life of your ownership, because the
> returns of capital keep chipping away at your original book value. In
> effect, the units cost you somewhat less than the original price,
> because you got back part of the capital, bit by bit, as the trust paid
> out some "return of capital" in their distributions. (If you had a
> DRIP, I think the monthly purchases also keep fiddling the ACB value
> ... ouch)
Sure. Just keep in mind that 'return of capital' is a real phenomena, and
not some magic trick. The whole idea with a trust is that eventually the
assets of the trust will be depleted or the trust will be bankrupt or
otherwise worthless. They are only able to pay the 8%/year in distributions
because they are raping the assets of the business, rather than using their
cash flows wisely to improve/upgrade/maintain their business.
> b) Computing the tax on these is nothing simple, especially the ACB.
> Hope your broker keeps track for you, or else you'll be in Excel Hell
> when you sell (poetry!)
Yes. And hope your broker's computer is properly programmed to keep track.
Many aren't, or aren't programmed properly.
> c) Company can and often do alter the proportion of distributions
> allocated to the three categories over time
They can't do so arbitrarily. Some businesses obviously have a more stable
longer-term profile than others. I think its fairly safe to assume that a
pipeline trust such as Enbridge Income Fund would pretty much have the same
distribution proportions year after year, while a highly cyclical business
or a 'trust of trusts' or mutual fund would have widely varying
distributions.
Makes it extremely difficult to do any strategic tax planning when someone's
portfolio is full of these. Sometimes they can't even provide preliminary
figures, nevermind actually get the real figures out on time for income tax
returns to be filed.
> d) The big shock to me was that a lot of trusts pay almost none of
> their distribution as dividends. This is not obvious - I had to visit
Of course not. Dividends are tax paid-up. The whole point of income trusts
is to distribute operating *income* before it becomes taxed.
Dividends would generally arise from a trust investing in interests of
taxable corporations. For instance, an oil income trust might own an
interest in a numbered company that performs certain well services or
maintenance. Some of the structures are actually very complex.
> the investor relations page of each company separately, and dig around.
> Many post the current breakdown and past history, though some companies
> do not seem to post this info at all. I found several paying 90-95%
> "other income" (fully taxable) and 5-10% Return of Capital (taxable
> capital gain, 50% inclusion, changes your ACB), with ZERO percent
> dividend. Others have a dividend share of a small percentage. I have
> not yet found any paying more than, say, 25% of their distribution as
> dividends.
Once again, 'return of capital' is not a taxable capital gain. And
distributing paid-up dividends completely negates the purpose of an income
trust, especially for RRSP investors.
> Given my discovery in (d), I have to conclude that the pain of holding
> an income trust outside my RRSP is just too great. First there is too
Why? The idea of an income trust outside a RRSP is that you will be taxed
at your personal tax rate, and not at a very high rate of taxation
applicable to a corporation.
Corporate operating earnings are taxxed no matter what. If a corporation
makes $10, they can either pay $44 in taxes, and give you $56, or they can
(through the income trust model), give you $10, and let you pay taxes on
that $10 at your tax rate. If you are in a 35% tax bracket, you would only
pay $35, so you would be better off by $9.
Income trusts are trading at irrationally high valuations on the market, so
I completely agree with your statement. The idea is good, but at these
valuations, the returns are very poor.
> much fully taxable "other income", and second the tracking of the ACB
> sounds like a paperwork nightmare. I now intend to limit them to
> holding inside my RRSP, so I can forget all the ACBs and shelter the
> 90+% fully taxable income. For my direct investments outside my RRSP I
> will stick to common stocks that pay a plain, simple dividend outside
> to get the full dividend tax credit. I only have to report a capital
Good plan, just don't buy dividend paying stocks that are overvalued and
will go down in the future ;).
> gain when I actually sell the stock. A stock with a DRIP may have ACBs
> to keep straight, but oh well.
Stocks can have reductions in stated capital as well. This is considered in
the same fashion as 'return of capital'. Sears Canada Holdings recently
went through this process when they sold their credit cards to the JP Morgan
bank, and returned $13/share to their shareholders.
> If so many income trusts pay mostly "other income" (fully taxable) or
> RoC, and zero or very little dividend, where is the vaunted tax benefit
> to the retail investor? Eh!? The media made such a big deal out of the
There isn't much of a tax benefit anymore to a retail investor with a job.
And the valuations have been bid so sky-high that returns are likely to
remain poor.
> Goodale Surprise, and income trusts rallied greatly. Yet I now find
> many of them qualify for the Enhanced Dividend Tax Credit either barely
> or not at all. Am I confused?
No. Not confused at all. The general public, and seniors nostalgic for the
days of 10% savings accounts (as existed in the 1970s) are extremely
confused however.
With my minor point about the treatment of return of capital, your reasoning
is mostly correct.
Don
news:1148680037....@j33g2000cwa.googlegroups.com...
> If so many income trusts pay mostly "other income" (fully taxable) or
> RoC, and zero or very little dividend, where is the vaunted tax benefit
> to the retail investor? Eh!? The media made such a big deal out of the
> Goodale Surprise, and income trusts rallied greatly. Yet I now find
> many of them qualify for the Enhanced Dividend Tax Credit either barely
> or not at all. Am I confused?
One thing that is painfully obvious from all this is that retired seniors
seeking higher income in a time of low interest rates should avoid income
trusts. The complexities and risks are just too great. Any senior
contemplating one of these instruments should ask the sales person for an
explanation, in simple language, of the concept of "return of capital." If
you don't get a straight answer, run away. In the sales pitches, you hear a
lot about high yield but not much about return of capital. Furthermore,
anyone thinking about buying one should focus, above all, on TOTAL RETURN.
The money you get back every month may sound attractive, but also think
about how much you will have a few years later when it is time to sell.
ztip guy
>> RoC, and zero or very little dividend, where is the vaunted tax benefit
>> to the retail investor? Eh!? The media made such a big deal out of the
>> Goodale Surprise, and income trusts rallied greatly. Yet I now find
>> many of them qualify for the Enhanced Dividend Tax Credit either barely
>> or not at all. Am I confused?
>
> One thing that is painfully obvious from all this is that retired seniors
> seeking higher income in a time of low interest rates should avoid income
> trusts. The complexities and risks are just too great. Any senior
Complexities and risks? I think you just need to look at the underlying
businesses to figure out why they are not good investments.
In the oilfields for instance, it is the big oil and gas companies that have
been selling off underperforming assets to the income trusts. If the assets
were so great, then why wouldn't they keep them for themselves?
In the airline industry, a major Canadian airline sold off one of its
subsidiaries into a trust, as well as a frequent flyer program. If those
were such profitable assets, why not keep them?
The list goes on and on. A major pipeline selling off existing pipeline
assets to focus on growth in other areas. Power generators selling off old
powerplants that are beyond their prime and ready for a gazillion dollars of
impending maintenance. When the shit really starts hitting the fan for some
of these businesses, Canadian investors will rightly be outraged that they
were so gullible in paying top dollar for them.
> contemplating one of these instruments should ask the sales person for an
> explanation, in simple language, of the concept of "return of capital." If
> you don't get a straight answer, run away. In the sales pitches, you hear
> a lot about high yield but not much about return of capital. Furthermore,
Its pretty sad. The trusts really started to become popular around the time
that a college professor did a study showing outperformance of 'dividend'
paying stocks. Many of the trust salespeople have tried to equate the
concept of long-term dividend payment and dividend growth to the supposedely
high "dividends" paid by income trusts. Many senior citizens are nostalgic
for the late 1970s/early 1980s when one could get 15%/year in a bank savings
account (nevermind the effects of inflation), so they get hooked into the
marketing pitch. And to top it all off, the "financial press" has somehow
distorted the definition of 'fixed income' to include income trusts --
completely innappropriately I might add because income trusts are anything
but 'fixed income'.
> anyone thinking about buying one should focus, above all, on TOTAL RETURN.
> The money you get back every month may sound attractive, but also think
> about how much you will have a few years later when it is time to sell.
Indeed. If you shop around for brokers, you can get some that only charge
$2/trade for Canadian equities these days. Its far less expensive in the
long run to build a portfolio of quality equity interests, and then sell off
bits and pieces every month if the dividends don't cover it, than it is to
pay for an explicit 'income' product where a bunch of highly paid managers
are doing exactly the same, but collecting massive fees to do so.
Don
news:127f20h...@corp.supernews.com...
> Its pretty sad. The trusts really started to become popular around the
> time that a college professor did a study showing outperformance of
> 'dividend' paying stocks. Many of the trust salespeople have tried to
> equate the concept of long-term dividend payment and dividend growth to
> the supposedely high "dividends" paid by income trusts. Many senior
> citizens are nostalgic for the late 1970s/early 1980s when one could get
> 15%/year in a bank savings account (nevermind the effects of inflation),
> so they get hooked into the marketing pitch. And to top it all off, the
> "financial press" has somehow distorted the definition of 'fixed income'
> to include income trusts -- completely innappropriately I might add
> because income trusts are anything but 'fixed income'.
> Indeed. If you shop around for brokers, you can get some that only charge
> $2/trade for Canadian equities these days. Its far less expensive in the
> long run to build a portfolio of quality equity interests, and then sell
> off bits and pieces every month if the dividends don't cover it, than it
> is to pay for an explicit 'income' product where a bunch of highly paid
> managers are doing exactly the same, but collecting massive fees to do so.
Very well said. I wish all the many seniors in the area where I am living
could read what you have just written. If I had more energy, I would put it
in the form of leaflets and go up and down the street tomorrow morning
throwing them all around in the wind. There have been a lot of people in
this area taken in by the sales pitches. I agree that almost anyone needing
income, seniors at least, would be better off investing in a few dividend
paying stocks in good companies. I would settle for 4% in a blue chip stock
that has possibilities for future appreciation. But 12%? 8%? When I see a
figure like that attached to any financial product, I shy away if for no
other reason than the time tested wisdom that high yield and high risk go
together.
nospamplease
iShares etf now) beats the tar out of the TSX over
the last 5 years:
http://tinyurl.com/fy49p
ztip guy
> tar out of the TSX over the last 5 years:
> http://tinyurl.com/fy49p
Thats because the trusts are disproportionately in the oil and gas, and
mining/coal sectors. How did the trust index do against the energy index,
for instance? Not even close, eh?
nospamplease
If you compare "S&P/TSX Capped Energy" to "S&P/TSX
Capped Energy Trust" http://tinyurl.com/hlcs8 and
factor in the yield difference, it gets a lot closer.
I'm not saying every retiree should only hold
trusts. I'm just saying the "painfully obvious"
doom and gloom comment about trusts is not
justified by the numbers.
Example: the capped REIT index beats the tsx:
http://tinyurl.com/p9o8k
Don
news:P81eg.35762$Qq.3687@clgrps12...
> I'm not saying every retiree should only hold trusts. I'm just saying the
> "painfully obvious" doom and gloom comment about trusts is not justified
> by the numbers.
If the trusts ever attain what my neighbors down the street think they are,
that is, high yield without risk that just keeps on continuing, year after
year, then I will abandon all doom and gloom and throw my arms high into the
air and shout for joy. The trusts will have achieved what no financial
product ever did before, so certainly we should all rejoice and dance and
hold a great feast. But, just a moment, then everybody would want to buy
trusts, and nobody would buy any other kind of stocks, so the economy might
collapse and wipe out the trusts. And then everyone would be overcome with a
feeling of doom and gloom.
nospamplease
so than stocks. Picking individual units can he
hazardous. Even the so-called "good ones" can tank
(SPF.UN!). I'm just saying the trusts, as a group
(RTCM-I, which includes SPF), have been high yield
low risk year after year. Well, so far anyway. My
trust holdings have done better lately than my
dividend stocks. When the market (or the economy)
tanks, the trusts will get hit at least as hard as
everything else. But, trusts that can hold their
yield will likely bounce back faster than anything
else. Of course any of your neighbours who think
they can hold *any* investment without risk are
dreaming.
ztip guy
> individual units can he hazardous. Even the so-called "good ones" can tank
> (SPF.UN!). I'm just saying the trusts, as a group (RTCM-I, which includes
> SPF), have been high yield low risk year after year. Well, so far anyway.
> My
In an economic up-cycle, sure. But have we had enough of a cycle with the
trusts to really see how they will perform? When they are paying out,
collectively, close to 100% of cash flow (compared with, for instance, the
Royal Bank of Canada, that only dividends 39% of its profit), the margin for
error is rather thin. In other words, things would have to get very ugly in
Canada for the typical dividend-paying stock to chop its dividend --
whereas, if trusts even have one misstep or a quarter gone bad, there simply
isn't cash in the bank to pay up.
> trust holdings have done better lately than my dividend stocks. When the
> market (or the economy)
Sure. But if you leveraged your individual dividend stocks to the extent
that a typical trust is leveraged, your dividend stock portfolio would have
blown away the trust portfolio.
Most financial professionals wouldn't recommend that a senior citizen
leverage their portfolio to the max through a margin account. However, by
selling seniors trusts, that is, in many cases, exactly what they are doing,
if not explicitly, then implicitly.
> tanks, the trusts will get hit at least as hard as everything else. But,
> trusts that can hold their
Probably harder, due to the leverage and rather low cash reserves and
retained earnings.
Another interesting fact about trusts is the terms on which they are able to
obtain financing. Because they tend to pay out most of their cashflow,
people who lend to them (ie: bondholders) tend to demand more of a premium
for taking on that kind of risk. So instead of, for instance, a rock-solid
business issuing bonds at a small premium over the risk-free rate, they are
paying substantially more to borrow the money. This shows up against the
bottom line if not immediately, then over time.
> yield will likely bounce back faster than anything else. Of course any of
> your neighbours who think
Sure, at some point, there will be a flight to quality. But just look at
how dramatically the trusts that chop distributions drop.
Don
> Most financial professionals wouldn't recommend that a senior citizen
> leverage their portfolio to the max through a margin account. However, by
> selling seniors trusts, that is, in many cases, exactly what they are
> doing, if not explicitly, then implicitly.
And most financial professionals wouldn't recommend that a senior citizen
put a big chunk of money in a single dividend-paying stock. They would
stress the importance of diversification in mutual funds. Yet many recommend
investment in individual trusts as if they were a magic solution to the low
yield in other things. There has to be more to the story than objective
advice.
Alan Bowler
>
> I agree that the ACB is awkward. I'm a programmer, and have a
> spreadsheet that tracks my ACB and I recently had to amend my taxes
> because there was a flaw in my formula. ACB is a pain even on
> ordinary stocks, and a real pain on the trusts.
> It's a pain I accept. Most of my trusts are in my RRSP.
That avoids one other big pain of trusts. The tax slips arrive
very late.
However, one of the tax advantages of many of the trusts is that
many are designed to make profits appear ultimately as capital
gains, and you lose that when holding them inside an RRSP.
ztip guy
> put a big chunk of money in a single dividend-paying stock. They would
> stress the importance of diversification in mutual funds. Yet many
> recommend investment in individual trusts as if they were a magic solution
> to the low yield in other things. There has to be more to the story than
> objective advice.
Yup. I see a lot of instances where a senior has both a substantial
portfolio of bonds, and has a significant portfolio of highly leveraged
trusts. In essence, owning both trusts and bonds simultaneously is akin to
attempting to both go long and short the bond market -- going long the bond
market by owning bonds and/or bond funds, and shorting the bond market by
owning trusts that are leveraged.
The 'problem' is that while the bonds held by the typical senior have a
yield of, for instance, 4.5%-5% (flat yield curve these days) for high
quality corporates, the trusts they own have issued debt at 6%+ because they
constitute poorer credit risk. If you consolidate the balance sheets of the
trusts onto that senior citizen's balance sheet, you would see that there is
borrowing at 6.5%, and lending (bond ownership) at 4.5%. Hardly a winning
proposition for the senior, who is looking for the best returns possible.
darkness39
And there is-- more than objective advice.
Partly ignorance, but also the fact that retirement planners are
commission-remunerated.
So are investment bankers. And of course the lawyers (who get paid for
deals done, not deals that don't happen).
And everyone else in the value chain taking a fee if these things get
floated, and sold to investors.
There are legitimate investment trusts: where there is a core,
underlying, long term asset eg real estate, or a natural resource
deposit. And where the tax structure is advantageous v. a corporate
form of ownership. However any tax driven strategy has the risk that
the government will change the tax legislation-- it is seldom strong
enough a rationale, on its own, for an investment.
An oil producing IT is a 'pure play' on the oil price, and so is
attractive to investors seeking that exposure (more of a pure play than
an oil company).
Other than the most conservatively financed investment trusts, I don't
think they are appropriate for most retirees.
Don
news:1148991364.4...@i40g2000cwc.googlegroups.com...
> And there is-- more than objective advice.
>
> Partly ignorance, but also the fact that retirement planners are
> commission-remunerated.
>
> So are investment bankers. And of course the lawyers (who get paid for
> deals done, not deals that don't happen).
>
> And everyone else in the value chain taking a fee if these things get
> floated, and sold to investors.
Yes, interesting. Is it possible that the financial planners at the bottom
of the chain get higher commissions for selling income trusts to customers,
that is, higher than they would get for selling, say, an equity mutual fund?
James
advantaged?
I don't know if FDG is considered an income trust but it has high
income from coal.
ENT income from oil and gas.
darkness39
of income than can be secured with bonds or dividend paying stocks.
The FP gives the client a portfolio of ITs. The FP doesn't really
understand the risks in these geared vehicles, nor the issues regarding
income v capital distribution. Neither does the client.
It is certainly the case that primary (new) issues pay far higher
commissions than secondary buying and selling on the client's behalf.
For customers with 'wrap' accounts, this shouldn't matter. But FP
compensation is an opaque area (at least to me).
Alan Bowler
> Any comments on FDG and ENT on the NYSE? Are their income tax
> advantaged?
>
> I don't know if FDG is considered an income trust but it has high
> income from coal.
Fording Coal is definitely an income trust. The units that trade on the
NYSE as FDG trade on the TSX as FDG.UN. They are the same shares,
it is just the the NYSE doesn't use the ".un" to distinquish
trusts and limited partnerships like the TSX does.
>
> ENT income from oil and gas.
Same deal for ENT and ENT.UN.
If you are a Canadian investor, yes there is some measure of
tax advantage to the way profits from the underlying companies
gets to investors. There might some for US investors also,
but I have not had reason to look into that.
Don
> Or being less sinister. The client comes in asking for a higher level
> of income than can be secured with bonds or dividend paying stocks.
> The FP gives the client a portfolio of ITs. The FP doesn't really
> understand the risks in these geared vehicles, nor the issues regarding
> income v capital distribution. Neither does the client.
With all the uncertainty and doubt surrounding trusts, one would expect that
a financial professional would be cautious in recommending them to clients,
especially seniors. And yet there seems to be great enthusiasm among
financial planners, especially in the area where I live, in recommending
these products as a way to get higher income in lean times. I have heard of
instances where people tie up a substantial proportion of their net worth in
trusts. Not a smart move and not a recommendation one would expect from a
professional. In light of these facts, it seems to me to be a reasonable
hypothesis to consider is that higher sales commissions, in addition to the
lack of understanding that you mention, are at the root of the trouble.
darkness39
Successful FPs are salesmen, not analysts. They don't think for
themselves, they drive commission. The days of a long term
relationship with a broker, of the kind my father had, are long gone.
And those old brokers had survived bad times and good, and did not
'churn' their client accounts.
Now the young guys have commission and revenue targets-- primary issues
are a great way to meet that. The easiest sell is to an existing
customer, a new product. Or for a young guy or gal starting out,
whatever is 'hot' to the new leads as customers-- the new leads come in
off the street, or direct mail, and themselves know very little about
investing.
I have yet to meet a broker under 45 who can think 'value' as an
investment strategy.
You get old ladies being sold income trusts. A better strategy would
be to invest them in a mix of blue chip bonds and stocks, and sell some
of the portfolio as and when they needed to. Instead, they are sold
income trusts (which via capital payouts are doing exactly the same
thing) which have, potentially, a much higher level of risk.
Add to that most people are momentum driven in terms of the stock
market/ investing. Whatever has gone up last, that is what they buy.
That is how market rises get turned into bubbles--- the theoreticians
have struggled to understand this, down the years. It's why 'value'
and 'contrarian' investing are such difficult disciplines. You buy a
stock, it halves, you buy more, you wait, it halves again. By this
time, your clients have ditched you.
You might make 10 times on the investment, but in the meantime, you
have been fired, someone else has sold the investment at a loss.
Don
Thanks. That is useful information. One thing I have noticed over the last
decade or so is that the number of "young guys," as you call them, who
operate in the business rise and fall along with the market itself. When the
boom is going on and the market is near the top, you see many splashy
half-page or full-page ads in the little local papers urging people to get
in on the splendid advantages coming from owning equity mutual funds. The
wisdom of regular investment is stresssed (even though the market is at an
historic high). Some companies offer "seminars" to prospective clients.
After a downturn in the market, the ads get smaller and less frequent and
the seminars stop. Nobody says much about advantages of regular investment
and dollar cost averaging any more. The little local papers have trouble
getting advertising revenue. But the market eventually recovers and a new
crop of sales people, or the same ones who have been in hibernation, become
visible again.
darkness39
Don wrote:
> "darkness39" <darkn...@yahoo.com> wrote in message
> news:1149062023....@i40g2000cwc.googlegroups.com...
>
> > Successful FPs are salesmen, not analysts. They don't think for
> > themselves, they drive commission.
> > You might make 10 times on the investment, but in the meantime, you
> > have been fired, someone else has sold the investment at a loss.
>
> Thanks. That is useful information. One thing I have noticed over the last
> decade or so is that the number of "young guys," as you call them, who
> operate in the business rise and fall along with the market itself. When the
> boom is going on and the market is near the top, you see many splashy
> half-page or full-page ads in the little local papers urging people to get
> in on the splendid advantages coming from owning equity mutual funds. The
> wisdom of regular investment is stresssed (even though the market is at an
> historic high). Some companies offer "seminars" to prospective clients.
The worst tarts are the fund 'experts' who take commission from fund
companies to appear at these seminars. I remember listening to Brian
Costello on what we would now call a 'podcast' on Air Canada in 1994
about the virtues of emerging markets. Unsurprisingly, within 6 months
Mexico had devalued and they had crashed. Some of those markets are
only now reaching their pre 1994 highs.
> After a downturn in the market, the ads get smaller and less frequent and
> the seminars stop. Nobody says much about advantages of regular investment
> and dollar cost averaging any more. The little local papers have trouble
> getting advertising revenue. But the market eventually recovers and a new
> crop of sales people, or the same ones who have been in hibernation, become
> visible again.
Slow and steady wins the game. But as a 25 year old guy or 'gal', you
are not, now, going to be given 20 years by a major firm who employs
you to build up a clientele with significant personal wealth, by
following the clients as they rise in their careers and build up
portfolios. The reality is the sort of 50 year relationship my father
had with his broker is dead as a concept.
We have become conditioned to this idea of double digit returns, and
quick flip, whereas the reality is the really big money has been made
by buy and hold strategies, in funds or stocks, where the tax from
realisations doesn't kill you. *tax* is the big enemy of wealth
building (that, and buying too high) and I include in tax strategies to
'avoid' tax which simply place you in the hands of high commission
products.
There is a lot about markets now that reminds me of the late 1960s, the
high PEs: the market peaked in 1966, and didn't rise above 1000 on the
Dow again until 1979. Of course, in the same time you had double digit
inflation, so the value of the Dow after inflation fell by over 60% in
that period. Your returns were earned in dividends (which were highly
taxed).
Now we have relatively low inflation, but also low dividend yields. So
returns are likely to be 6-7% pa, before expenses (ie current dividend
yield plus the perpetuity of likely dividend growth), but the world
thinks you can get 15% pa just by flipping condos.
Somewhere expectations are going to meet in the middle with reality. I
fear a very unhappy and painful crash.
North Americans (Anglo Saxon countries in general) are, literally,
living on borrowed time. They save none of their income, and rely on
increases in their balance sheets to finance future retirement and
spending. I can't see this going on for forever.
fudge
exceptions? Nah, not possible!! The Golden Rule. "He Who Has The Gold, Makes
The Rules"
Farmer John
Don
> The worst tarts are the fund 'experts' who take commission from fund
> companies to appear at these seminars. I remember listening to Brian
> Costello on what we would now call a 'podcast' on Air Canada in 1994
> about the virtues of emerging markets. Unsurprisingly, within 6 months
> Mexico had devalued and they had crashed. Some of those markets are
> only now reaching their pre 1994 highs.
I have seen a couple of those "experts" in action at two seminars my wife
and I attended back around 1998. I wondered at the time about their fees. In
one case the expert advised that real estate is dead and that smart people
put their money into mutual funds, especially tech stocks and oil and gas
trusts. Neither of us were knowledgeable these matters at the time, but we
smelled a rat and had a good laugh between ourselves. Of course, that was
just before the crash in tech stocks. And our real estate has been doing
just fine.
I do suspect what you predict about a coming crash will turn out to be true.
But I can imagine several possibilities. There could be a moderate or minor
crash something like the one in 2000 (in stocks and/or real estate),
followed by a new run up and bubble, then followed by a huge crash something
like the one in 1929 or maybe worse. I do not have the expertise to predict
the likelihood of these various possibilities, but have a vague feeling that
there are both better and worse things still to come.
Don
news:447f1...@news.cybersurf.net...
I would love a flat tax if I were in the highest bracket and the flat tax
amount were in a lower bracket.
darkness39
Don wrote:
> "darkness39" <darkn...@yahoo.com> wrote in message
> news:1149149141.3...@i39g2000cwa.googlegroups.com...
> > The worst tarts are the fund 'experts' who take commission from fund
> > companies to appear at these seminars. I remember listening to Brian
> > Costello on what we would now call a 'podcast' on Air Canada in 1994
> > about the virtues of emerging markets. Unsurprisingly, within 6 months
> > Mexico had devalued and they had crashed. Some of those markets are
> > only now reaching their pre 1994 highs.
>
> I have seen a couple of those "experts" in action at two seminars my wife
> and I attended back around 1998. I wondered at the time about their fees. In
> one case the expert advised that real estate is dead and that smart people
> put their money into mutual funds, especially tech stocks and oil and gas
> trusts. Neither of us were knowledgeable these matters at the time, but we
> smelled a rat and had a good laugh between ourselves. Of course, that was
> just before the crash in tech stocks. And our real estate has been doing
> just fine.
>
> >
> > Somewhere expectations are going to meet in the middle with reality. I
> > fear a very unhappy and painful crash.
> >
> > North Americans (Anglo Saxon countries in general) are, literally,
> > living on borrowed time. They save none of their income, and rely on
> > increases in their balance sheets to finance future retirement and
> > spending. I can't see this going on for forever.
>
> I do suspect what you predict about a coming crash will turn out to be true.
I was imprecise in the way I spoke. I expect a 'crash' in terms of
desired living standards coming into collision with the actual returns
that are possible on financial assets.
This doesn't mean, necessarily, that stock and other markets are going
to plunge. Rather that the world will revert to 'normal' by which I
mean the long run mean (average) returns for financial assets: in the
case of stocks 3 to 5% above inflation *before* costs and taxes.
On residential real estate, I have been calling for a crash so long
that I am hoarse. TD Bank publishes some good 'bubble indicators' on
Canadian housing markets. The bottom line is Vancouver and Victoria
are way overvalued, Toronto is looking bubbly (especially in the condo
market!) but not out of control (I see lots of signs of bubble
behaviour in TO condos though-- flipping etc.). Most other places are
looking OK(ish)-- Calgary and Edmonton well sustained by rising after
tax incomes and inward migration.
One thing to watch is the big impact of the Toronto housing market on
the rest of southern Ontario, particularly cottage country. The GTA
feeds the rest of the market, as people sell in the GTA and move
further outwards.
Good discussion of this over at the wealthy boomer message board
(financialwebring dot com).
The main threat to the Canadian housing market is the US market, where
any number of markets (coastal ones, but also Las Vegas) look very
overvalued and are, indeed, beginning to slow down. Big losses there
could lead to selling or reduced bank lending in CA.
There is a degree of 'contagion' in all this: British investors, having
made so much money in their own houses, have been buying up properties
all over Europe, in Dubai, and in Florida, driving up prices there.
This would be the recipe for a nearly world wide property smash. Now,
so far, only Australia (that I know of) has gone through this-- prices
down about 20% from the peaks, but the economy remains strong due to
exports to the likes of China. Whether the rest of us will be so lucky
as to have a gentle landing, I don't know.
> But I can imagine several possibilities. There could be a moderate or minor
> crash something like the one in 2000 (in stocks and/or real estate),
> followed by a new run up and bubble, then followed by a huge crash something
> like the one in 1929 or maybe worse. I do not have the expertise to predict
> the likelihood of these various possibilities, but have a vague feeling that
> there are both better and worse things still to come.
There I agree with you!
The problem is, when inflation is very low, the ability of the Central
Banks to manipulate the economy with interest rates is also low.
Interest rates by definition cannot go below zero. When inflation is
10%, a 5% interest rate is tantamount to giving money away to stimulate
the economy. When inflation is 2%, even a 0% interest rate has a
limited ability to reflate the economy. This is the mess Japan got
itself into.
By acting aggressively after each bubble 'pop' the Central Banks have
sent a signal to investors that their risk taking will be underwritten.
This has encouraged progressively more risky behaviour, and big
allocations of investment to risky areas (be it commodities speculation
or residential housing).
That said, the world economy is growing as fast as it has since the
1970s. People are being lifted out of poverty in emerging markets all
over the world, and life expectancies continue to rise (by something
like 3 years in the UK in the last 20). Corporate profits are at
record levels and show few signs of pressure. Inflation is low.
So actually things are pretty good. The danger is excess. Where I see
excess in the world is the US (and other Anglo Saxon) property markets,
and in the US current account deficit (the gap between US investing and
savings). Neither of those can go on forever.
darkness39
There is vast confusion between a simple tax system and a 'flat tax'.
Almost every economist will tell you that for theoretical and empirical
reasons, a simple tax system is a good idea: the minimum distortion for
economic behaviour.
There is far less evidence regarding a 'flat tax' ie one tax rate.
It is very likely that for low incomes, the effect of an additional
dollar of after tax income on work effort (hours worked) is very high.
It is also likely that for high incomes, the additional dollar has
little effect.
So if one is cutting taxes, one should cut Social Security (CPP,
National Insurance) taxes which fall on all workers, and which hit
employers as well (disincentivising them to hire people).
Cutting income taxes, which only fall on the better paid, is far less
likely to have a positive impact.
Alan Bowler
>
> Cutting income taxes, which only fall on the better paid, is far less
> likely to have a positive impact.
But much more likely to gather political donations.
(Those of us with more money are more likely to make
party donations.)
One thing that always amazes me is this assumption in discussions
that a flat tax system will simplify doing your income tax return.
It would a little, but not significantly. On the federal taxes
it would remove 1 or two lines from schedule one. The Ontario
provincial would drop a couple more because it does extra tax brackets
as a surtax calculation. The hard part of doing income taxes is
alway the calculation of the income, and flat or progressive
taxation does not change that.
We do have a flat tax, the GST, and I've never seen any claim
that that makes things easier. (Fairer than its predecessors yes,
but not less paperwork.)
Don
> Cutting income taxes, which only fall on the better paid, is far less
> likely to have a positive impact.
But a whole lot of people take the bait around election time, rich and poor
alike.
Christopher Browne
It wouldn't even have a material effect on the size of the tax
legislation.
It only takes about 3 pages worth of the Income Tax Act to characterize
the tax brackets (e.g. - the varying rates).
It take 3 pages because they have to put it in verbose English
legalese (that *isn't* that hard to read) as opposed to writing it up
as, say, 4 formulae, which could occupy 4 lines.
Basically it's that the Hansard transcriptors don't speak TeX ;-).
At any rate, expressing the tax brackets never was the complex part of
the tax law. It's just silliness when people suggest otherwise.
There are 256 some sections; only 3 pages in one part are about tax
brackets...
--
let name="cbbrowne" and tld="gmail.com" in name ^ "@" ^ tld;;
http://linuxdatabases.info/info/internet.html
"Feel free to contact me (flames about my english and the useless of
this driver will be redirected to /dev/null, oh no, it's full...)"
-- Michael Beck, describing the PC-speaker sound device