rrsp

When you join my Inner Circle service, you get to ask me your own personal investment questions, plus you get to see what other Inner Circle members have asked, along with our answers. So you can see how the service works, and get a sense of how you could benefit from it, I’d like to share a recent member question about index-linked GICs. I hope you enjoy and profit from it. Q: Hi Patrick. I am interested in your opinion of index-linked GICs. The returns are interest based, so I think they are best bought in your RRSP. Recent stock market volatility has us wanting to safeguard a portion of our portfolio. Thanks....

The federal government first made tax free savings accounts (TFSAs) available to investors in January 2009. These accounts let you earn investment income — including interest, dividends and capital gains — tax free. However, you could only contribute $5,000 in 2009 to start your tax free savings account. Every year, you gain an additional $5,000 of contribution room (indexed to inflation and rounded to the nearest $500 on a yearly basis). Plus, you get to carry forward unused contribution room from previous years. So in 2010 you’ll have $10,000 of contribution room, $15,000 in 2011, and so on. (Read on for a simple strategy to help you choose between your TFSA and your RRSP, and cut your tax bill in retirement.)...

Dividends that Canadians receive from U.S. corporations are subject to a 15% withholding tax. In most cases, however, you get a Canadian income-tax credit to offset that tax. U.S. securities held in an RRSP are not subject to withholding taxes, under terms of the tax treaty between the U.S....

TIM HORTONS INC. $31 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 180.7 million; Market cap: $5.6 billion; Price-to-sales ratio: 2.5; SI Rating: Average) is one of Canada’s largest fast-food restaurant chains. Its 2,971 outlets mainly serve coffee and donuts. It also has 556 stores in the U.S., mostly near the Canadian border. Franchisees own 99% of the company’s outlets. Tim Hortons was a wholly owned subsidiary of U.S.-based Wendy’s International Inc. (now part of Wendy’s/Arby’s Group Inc., New York symbol WEN) until March 2006. That’s when it completed an initial public offering of common shares at $27.00 each. In September 2006, Wendy’s handed out its remaining 82.75% stake to its own shareholders as a special dividend.

Lower taxes lure Tim’s north

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This is part 1 of a two-part series on steps you and your spouse can take to cut your income-tax bills in retirement. We’ll publish the second part in our next issue. In many families, one spouse earns more money than the other. That, of course, puts the spouse with the greater income in a higher tax bracket. It also means that any extra money earned on investments, such as through capital gains, interest or dividends, is taxed at a higher rate. Revenue Canada won’t let the higher-income spouse simply give, or “gift,” money saved or invested to the lower-income spouse. “Attribution” rules apply if you do that. That means the higher-income spouse must pay tax on any gains or investment income from those funds....

FORT CHICAGO ENERGY PARTNERS L.P. $8.47 (Toronto symbol FCE.UN; Units outstanding: 136.3 million; Market cap: $1.1 billion; SI Rating: Extra Risk) owns and operates energy infrastructure across North America. One of its major holdings is a 50% interest in the Alliance natural-gas pipeline, which runs 3,000 kilometres from Fort St. John, B.C., to Chicago. Enbridge Inc. owns the other 50%. Fort Chicago and Enbridge also own 85.4% of the Aux Sable natural gas liquids plant. As well, Fort Chicago owns 100% of the 1,324-kilometre Alberta Ethane Gathering System. Fort Chicago has added to its power-plant holdings over the last couple of years. It now owns natural gas-fired cogeneration plants in Ontario, California and Colorado, plus power plants in Ontario and Prince Edward Island....

EPCOR POWER, L.P. $15.04 (Toronto symbol EP.UN; Shares outstanding: 53.9 million; Market cap: $810.7 million; SI Rating: Extra Risk) has interests in 25 power plants in Canada and the U.S. These generate a total of 1,400 megawatts. In the three months ended June 30, 2009, EPCOR’s revenue rose 14.8%, to $165.2 million from $143.9 million. Cash flow per unit rose 29.1%, to $0.71 from $0.55. The trust’s plants generated and sold more power, including output from the Morris cogeneration facility in Illinois, which EPCOR bought late last year for $72.2 million U.S. Despite the improved results, EPCOR was still paying out almost all of its cash flow to unitholders, so it cut its quarterly distribution by 30.2%, to $0.44 a unit from $0.63, with the June 2009 payment. At this rate, it will pay out roughly 75% of its cash flow. EPCOR believes it can sustain this rate regardless of whether it remains a trust or converts to a corporation in 2011, when Ottawa’s new income-trust tax takes effect. EPCOR now yields 11.2%....

When you turn 71, you have to roll over your RRSP into a RRIF. However, you don’t have to sell any of your securities at that point. Your RRSP is simply redesignated as a RRIF (you do need to fill out some paperwork to open a RRIF account and complete the conversion). The portfolio stays the same until you make changes in it. The main difference between an RRSP and a RRIF is that you must make a minimum percentage withdrawal each year from your RRIF’s asset value, and report that amount as income for tax purposes. (You may withdraw amounts above the minimum at any time.) The yearly minimum gradually increases on a fixed schedule. It starts at 7.38% of the RRIF’s year-end value at age 71, reaches 8.75% at age 80, and levels off at 20% at age 90. The money you withdraw from your RRIF is taxed at the same rate as ordinary income, much like an RRSP withdrawal....

TFSAs let you earn investment income — including interest, dividends and capital gains — tax free. You could only invest $5,000 this year to start your TFSA. However, you gain an additional $5,000 of contribution room (indexed to inflation and rounded to the nearest $500 on a yearly basis) every year, plus you get to carry forward unused contribution room from previous years. (So in 2010 you’ll have $10,000 of contribution room, $15,000 in 2011, and so on.)

Use your tax free savings account to complement your RRSP

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An investor recently asked us a question that touches on several stock market investing concepts that we cover in our Canadian Wealth Advisor newsletter. He said, “Due to a corporate reorganization, I now have the option of cashing in $279,000 from insurance-company mutual funds, then transferring the money into my brokerage RRSP account. I prefer to invest the money directly in stocks you recommend, rather than hold mutual funds from my insurance company. However, the insurance company tells me that I have to cash in the funds first, then wait at least six weeks for the money to turn up in my brokerage RRSP account. I’m concerned that the market will turn up while the money is in transit and I’ll wind up missing out. What should I do?”...