Why it’s Never too Late for Low Income Canadians to File Their Taxes

August 25, 2016 12:38 pm
Taxes

Those earning $40,000 a year or less may be eligible for a range of benefits.

Most Canadians would like to see an end to poverty.  What if we told you that one organization, using the existing social benefits system, found a way to get $21 million into the pockets of 9,000 low income individuals in Winnipeg?  This is not Robin Hood and his gang – it’s the Community Financial Counselling Services (CFCS), an organization that helps people living at low income to file their tax returns.  They have been doing this important work for 42 years.

The latest federal budget makes an important commitment to low income Canadians – to help them complete and file their tax returns.  Many might assume this is a way for the government to bring in more revenue.  In actual fact, for the large majority of Canadians earning less than $40,000 a year, filing taxes doesn’t mean a bill to pay – it means extra benefits to collect.

This part of the budget was called “Helping Canadians Receive the Tax Benefits They Deserve” and promises that the Canada Revenue Agency (CRA) will contact low income individuals who have not filed a return, telling them what benefits they may be entitled to receive.

We often hear about the impact of poverty and income inequality on health, educational outcomes and child and adult well-being.  Might encouraging people to file their taxes help people avoid poor outcomes?  A look at some examples suggests an answer.

In Sudbury, Ontario, Mary, a single parent with two young children paying $800 a month to rent an apartment works part-time at minimum wage to earn $14,000 a year. By filing her taxes, she can access child benefits, the GST/HST credit, the federal working income tax benefit, the Ontario Trillium Benefit and the Children’s Activity Tax Credit.  She could more than double her income to $31,845 by filing her taxes in other words – not bad, and this would raise this family above the poverty line.

Raj, a recently widowed senior in Manitoba, aged 60 and disabled, struggles to live on $7800/ year in a private apartment. If she files her taxes she could receive a $674 monthly Allowance for the Survivor benefit since her deceased spouse was over 65. This benefit, as well as other federal and provincial refundable tax credits, would raise her annual income to $19,540, bringing her above the poverty line.

And it is not just additional income that filing taxes provides.

In Manitoba and Ontario, filing taxes allows some low income people to access provincial prescription drug coverage.  It also allows people with severe disabilities to receive extra tax credits and retirement savings grants.

So why don’t many low income people file taxes?

Many Canadians have no idea they would get money back, and they fear being told they have to pay the government for back taxes they cannot afford.  The CFCS, while accessing $21 million, found the total taxes owed by the 9,000 individuals they saw last year was $169,704.  Almost no one owed anything.

Tax filing support is a hugely important anti-poverty and health intervention.

The Canada Revenue Agency supports programs that prepare taxes for low income Canadians through its Community Volunteer Income Tax Program – that’s a good thing.  But these programs mostly operate in tax filing season, when waits are long and demand exceeds supply.  Before 2008, the CRA had more funding, provided more personnel, computers, in-person training and assistance with tax issues to agencies in many inner city areas.  Many of these programs were forced to scale back or close when the CRA’s funding was cut back.

Tax filing services such as these should be reinstated – and in fact extended – to provide service to low income Canadians throughout the year.

Filing taxes is also often held up by individuals who don’t have the identification or documentation necessary to access certain benefits to which they may be entitled. The CRA should work with provincial governments to address this issue.

It is time we make sure all low income Canadians are accessing the benefits Parliament has already agreed they deserve.  It is incumbent on the government to make sure everyone is aware of the benefits they are due. The CRA needs to provide strong support to ensure barrier-free tax filing for all those in need.

Gary Bloch

Gary Bloch is an expert advisor with EvidenceNetwork.ca and a family physician with St. Michael’s Hospital in Toronto.  He is a founding member of Health Providers Against Poverty. 

 

 

 

 

 

Silver_John_high res photoJohn Silver has more than 30 years’ experience in community health and non-profit community service management. He is currently the executive director of Community Financial Counselling Services in Winnipeg.

USEFUL LINKS

Child and Family Benefits Calculator (will give you estimated Child Tax Benefit, GST & Working Income Tax Benefit) http://www.cra-arc.gc.ca/bnfts/clcltr/cfbc-eng.html.

Old Age Security payment amounts (including tables for estimating supplement benefits such as Allowance for the Survivor based on income) http://www.esdc.gc.ca/en/cpp/oas/payments.page.

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The Danger of Border Crossing to Play US Lotteries

August 23, 2016 9:26 am
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The Powerball lottery drawing on January 13, 2016, was described as “the biggest jackpot in the history of the world” and it indeed set a record that will be hard to beat. The jackpot prize had an annuity value of $1,586,400,000 (over C$2 billion) and was eventually claimed by three Powerball tickets sold in California, Florida, and Tennessee.

As the multi-state jackpot grew steadily in the weeks ahead of the drawing, Canadian residents surged across the border to buy Powerball tickets in the United States. “The Canadians — they’re coming like crazy here for the lotto,” an official of the California State Lottery told CBS News. “You don’t have to be a U.S. citizen to buy a Powerball ticket, as long as you’re buying your tickets at an authorized retail location, then that’s fine with us.”

A clerk at a grocery store in Blaine, Washington, about a mile from the U.S.-Canadian border, said that 60 per cent of his customers buying tickets were from Canada, while a cashier in another town some 45 minutes south of Vancouver estimated that 95 per cent of its lotto ticket buyers were Canadian.

In order to win the Powerball jackpot, players must match five main numbers selected from 1-69 and a single Powerball additional number from a guess range of 1-26. The odds of winning a Powerball jackpot are one in more than 292 million, compared to a 1 in nearly 14 million chance to win in the Canadian Lotto 6/49 lottery.

It is legal for tourists and non-US residents to play the Powerball lottery. The official Powerball website clearly states, “You do not have to be a citizen or a resident to play the game. You can be a tourist.” Tickets must be bought in person at an authorized retailer in the United States or you can buy Powerball tickets online on theLotter.

Canadians who play the Powerball lottery should know in advance their tax obligations if they win. They will have to pay 30 per cent of their winnings in federal U.S. taxes and some states also collect tax on lottery winnings (for example, New York charges a tax of 8.82%). On the other hand, Canadians don’t have to pay tax on their U.S. lottery winnings in Canada, as lottery winnings are exempt from taxation under section 40(2)(f) of the Income Tax Act of Canada.

There is, however, a little known American law which could make it potentially illegal for Canadians to collect their Powerball winnings. According to the Immoral Articles law, “all persons are prohibited from importing into the United States from any foreign country any … lottery ticket, or any printed paper that may be used as a lottery ticket, or any advertisement of any lottery.”

Essentially this means that if you purchase a lottery ticket in the United States and it wins, it is illegal for you to cross the border to collect your winnings. In December 2015, U.S. border guards actually seized nine B.C. lottery tickets from a man crossing the border into the United States, although the seizure was not enforced and the tickets were returned to their owner.

There are ways for Canadians to legally get around this little-known U.S. law, including leaving their Powerball tickets in a safety deposit box in the United States, or with a trustworthy American friend. And despite the law, State of Washington lottery officials sent a reassuring message to Canadians during the billion-dollar Powerball jackpot frenzy stating they would help winners collect their prize money.

Canada: A Gaming Nation

August 16, 2016 3:08 pm
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Many people today are surprised to see Canada rising as a gaming nation. People all around the world often do not know what to expect of Canada for a number of reasons. The United States dominates the international conversation on almost all North American markets, to the everlasting frustration of its neighbours to the north and south. Culturally, many Canadians have struggled to make sure that people are aware of Canadian musicians and Canadian television shows, because even in that regard, the United States has a tendency to dominate. However, on the gaming front, the United States loses to Canada because of the problems with its gaming laws.

The Vegas Palms Online Casino is one of the most Canadian friendly casinos in the world right now, which really serves to demonstrate how important Canada is in terms of its role in the world gaming culture. When people go to http://www.vegaspalms.ca/ , they will be able to try more than 390 different games, including popular progressive jackpots. The Vegas Palms Online Casino is able to appeal to Canadian players in many different ways, and not just to the Canadian players from the English-speaking parts of Canada. People visiting the website from Quebec, for instance, will be able to enjoy all of the same casino games on the French language version of the vegaspalms website.

The successful online casinos of today need to recognize that they operate on an international level today, and that even within nations, there are going to be different cultures with their own languages and traditions. At online casinos, the creators obviously understand that this is the case. Language has been something of a battleground even within Canada for a long time, with many people in Quebec and the other French-speaking parts of Canada feeling as if they are culturally distinct from the rest of Canada and that they don’t get the recognition that they deserve. The nods to diversity have helped make the online casinos and others gaming sites like it successful today.

Canada: a gaming nation might not surprise Canadians themselves. Canadian culture has often valued indoor activities, and online gaming is one of the most popular indoor activities today. Canadians have learned to make their own fun during some of the coldest parts of their years, which can last a long time. Canadian culture does not have the reputation for being full of risk-takers, but people like this exist in every culture. Online gaming allows people to take calculated risks with small amounts of money, or potentially highly rewarding risks with large amounts of money. People can truly calibrate the level of risk that they want to take. Many Canadians lack the alarmist attitudes that a lot of Americans seem to share, which is one of many reasons why they seem to be triumphing over the United States when it comes to online gaming today.

Canadian Players Oriented Online Casinos

August 10, 2016 12:03 pm
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There are lots of Canadian players oriented online casinos today. Canada has not been the leader of the online casino gaming market. However, Canada has still managed to surge ahead of a lot of its competition by this point in time, allowing the country to start rising in prominence, even if Australia and most of Europe have enjoyed a head start. Canadian players oriented online casinos are some of the best that people are going to find today.

Canada now dominates the North American gaming market, and the United States continues to lag behind Canada at this point in time. The well-regarded Royal Vegas Online Casino is still not accepting U.S. players after all of these years. People can play free slot machines at Royal Vegas casino from all around the world, unless they are currently situated in the United States. American players trying to research the site are often going to find that their efforts will be blocked. The fact that Canada is not in the same situation gives Canada a huge advantage in the online gaming market.

Canadian players oriented online casinos will have a few characteristics in common. These casinos are working on appealing to the North American market. For one thing, it is important for these casinos to offer banking options that are good for Canadians. Banking varies from place to place, and plenty of online casinos today have gone out of their way to offer banking options that are favourable enough for Canadians.

For the most part, the Canadian players oriented online casinos are going to have most of the same games that people are going to be able to find at most online casinos. Most of the other characteristics of the good Canadian oriented casinos have become common through the industry, such as toll free support numbers and fast monetary payouts. Of course, when it comes to the online casinos that are in development, many people are going to want to know how to appeal to Canadian customers in terms of the games.

For instance, there is no doubt that online slot games are extremely popular in Australia, and that online gambling is hugely popular in Australia in general. Different games vary in terms of their popularity with different demographics. However, online slot games have managed to cross many different demographic boundaries. They are popular with players regardless of gender, age, and even their national boundaries it seems. Canadian casino game players also seem to really enjoy online casino slot games, even in comparison to many of the other online casino games that are available today.

For many Canadian players, accessibility is one of the only limiting factors when it comes to their casino game playing adventures. Many Canadian officials are going to want online casinos that are going to manage to stimulate the Canadian economy as well, as opposed to online casinos that are going to distribute Canada’s wealth overseas. Canadian players oriented online casinos should be able to help the Canadian economy in the long run.

Why You Need Professional Help When Trying to Fight a Traffic Ticket

July 21, 2016 9:12 am
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There are a variety of mishaps that can happen when a person is behind the wheel. One of the most common things that drivers have to deal with are traffic tickets. If you receive a traffic ticket and feel that you are not guilty, hiring experienced traffic ticket defenders can help you out greatly. Here are some of the reasons why.

They Know How to Get it Done

The first benefit that traffic ticket defenders bring to the table is their experience in the industry. Some drivers think that they can go into a court of law and get out of a ticket without the help of a legal professional. This will usually lead to a variety of different issues and may hurt the person’s chances of getting their ticket thrown out. Using a lawyer with previous experience is the best way to get the desired results.

Reducing the Ticket

In some instances, the ticket that a person gets will not get thrown out, but instead reduced. The best way to get this type of reduction is by working with a lawyer. They will be able to negotiate with the prosecutors to see what can be done with your particular case. Having a lawyer go to bat for you in this way will allow you to reduce the stress that this type of legal situation can cause. Be sure to speak with the lawyer about all of your options before deciding what you want to pursue.

It Is Less Expensive Than You Think

One of the biggest reasons why a driver will avoid getting this type of legal help is because they think a lawyer will cost too much. Usually, not having a lawyer on your side during a case like this can cost you more in the long run. Rather than having to pay the full price of the ticket, you can a lawyer to either get the ticket thrown out or greatly reduced. The money that you pay the lawyer will be more than worth it in the end.

Going in for consultations with different lawyers in an area is a great way for a person to get the right one hired.

Article by Vivian Smith. 

Want to Retire Rich? Better Join the Public Sector

February 17, 2015 12:00 pm
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The rest of us? Not so much. Welcome to the multi-tiered retirement system in Canada.

A two-tiered system

A while ago, I read an article discussing Canada’s evolution into a two-tier class system. No, we’re not talking about the 1% and everyone else, the class system referenced in this article is between public and private-sector workers. We Canadians appear to enjoy a decidedly comfortable middle-class existence, even post-recession, especially compared to our friends around the world. However, within this middle class society, there lurks an elephant in the room: the future of retirement, and our individual places within it.

According to a report entitled Canada’s Two-Tier Retirement by the Canadian Federation of Independent Business (CFIB), there are “stark discrepancies” between Canadian employees in the public and private sectors when it comes to retirement benefits. The report also provided two case studies comparing the employer pension plans of a public and private sector worker. Apparently, the gap in retirement nest eggs for these two types of workers is huge. Really huge. Over 35 years, these two workers, earning the exact same salary, will see a pension gap of $776,000. The private-sector worker will have $605,000 upon retirement, while the public sector worker will have a cool $1.38 million.

Defined-benefit vs. defined-contribution

Many people credit unions for the generous retirement benefits that public-sector workers enjoy, but that’s only part of the story. Employer-sponsored pension plans are either defined benefit (a DB plan) or defined contribution (a DC plan). DC pension plans depend on the accumulated value of invested funds, whereas DB pension plans guarantee you a monthly income amount up front, regardless of how the markets are doing. Guess which type of plan most public sector workers have? The DB plan.

Public-sector DB plans essentially guarantee a retirement income based on your years of service and income (often in your highest earning years), but those of us with DC plans? We’re at the mercy of how much we’re actually able to contribute over years of service, and market cycles and fluctuations.

When you guarantee a retirement income based on salary, the government (and therefore the taxpayers) are the ones ultimately responsible for making up the difference between what was promised and what was actually earned in these DB plans. This gets exacerbated by fact that we’re all living longer, including those with DB plans. The implications of this will be huge as the baby-boomer cohort of public-sector workers retire (with some retiring as early as 50 years old), and Canada’s shrinking population are left to pay for it. We are already beginning to feel the impact of these public-sector retirement policies.

Why it’s actually a three-tiered system

While the disparity between public and private-sector pension plans is discouraging enough, one could further argue that Canada has a three-tier retirement system because 60 per cent of the Canadian workforce has no access to a workforce pension plan, and will rely solely on their personal savings, investments and the government to pay for their retirement. Plus, the coverage rate for the registered pension plans in the private sector is only around 25 per cent. So there are public sector workers with their golden pensions, private sectors who are lucky enough to participate in any sort employer-sponsored pension at all, and everyone else.

What tier do you fall into? How do you plan on funding your retirement?

Written by: Melissa Allen, Marketing Project Manager at Workopolis

Originally published on Workopolis.

Gail Vaz-Oxlade Explains Why Learning About Money is a Life Lesson

April 10, 2014 12:09 pm
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Spring-cleaning season is a good time to face some other things you’ve been putting off. OLM sat down with Gail Vaz-Oxlade, the Canadian personal finance guru and host of the TV shows Til Debt Do Us Part and Princess to get some tips about getting your personal finances in order.

We ask Gail why so many Canadians are in debt in the first place:

“Canadian debt is increasing because most Canadians are still under the impression that the credit given out by lenders is disposable income. It’s not disposable income. Until we get our sappy little heads around the concept that one day we will have to pay it back, we will continue to get ourselves stuck in the debt hole.”

It is not entirely your fault though. Gail pointed out a credit rating system that is completely backwards, and that actually rewards debt:

“A credit institution’s only criteria are that you have a good credit score. But if you pay off the minimum balance on your credit card, you actually have a better credit score than if you were to pay it in full. So the system is set up to get you into debt. You’re score is higher because you are more profitable [to the company]!”

Even if you are wise enough not to treat credit like cash, there are other reasons we get into debt, like a sudden laid-off or firing. If this happens Gail’s advice is to alter your budget to include only the things you need:

“If this happens, you’ll want to go over your budget with a highlighter and a black marker. Highlight the things that you have to buy to keep living, and strike out everything that is a want. Cable, for example, is a want. Then, you are going to look for ways to reduce the costs of the things you need.”

With so many people struggling with their personal finances, we asked Gail if it is a good idea to teach personal finance in school:

“No it is not, this is a subject that should be taught at home. Learning about money is a life lesson. It is one of the things parents have to take responsibility for. I am one of the few people saying this, and I’m saying it every time somebody asks. And the reason is that children learn more from what we do, than what we say.”

Gail left us with some final tips about how to make better use of our dollars:

  • Track what you spend and always go shopping with a list.
  • When making a budget, use realistic numbers. Don’t pull them out of thin air.
  • No matter how bad your financial situation is, always save. There is never a perfect time to start saving so don’t wait.
  • Avoid credit-consolidating services as they hurt your credit score
  • The portion of income you put into retirement varies on when you start saving: 20-year-olds should invest 6 per cent, 30-year-olds should invest 10 per cent, and 40-year-olds should invest 18 per cent.
  • Buy products that stretch your dollar, these aren’t always the no-name brands. Visit savingmadesimple.ca for ideas.

 

Canadian Snowbirds and U.S. Income Tax

December 4, 2013 10:50 am
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If you plan to spend your winters in the U.S., you should be concerned with more than just ensuring your passport is up-to-date and that your bags are packed. Snowbirds – Canadian residents who spend part of each year in the United States – need to be aware of the potential liability to pay U.S. income tax on the same basis as a permanent U.S. resident.

U.S. citizens and Green Card holders must pay U.S. taxes on their worldwide income, regardless of their country of residence. Even though snowbirds only visit the U.S. for the winter months, there is the potential that they can be considered U.S. residents for income tax purposes and taxed in the U.S. accordingly.

Counting days in the U.S.

If you were present in the U.S. for more than 30 days in the current year and meet the Substantial Presence Test outlined below, you could get hit.

So, for example, if the total number of days spent in the U.S. from the test exceeds 182 days, you have met the Substantial Presence Test and you may be subject to U.S. tax on your worldwide income. However, if you were present in the U.S. for less than 183 days in the current year, you may be eligible to claim the Closer Connection Exception (explained below) and avoid being considered a U.S. resident for U.S. tax purposes.

Since the Substantial Presence Test calculation considers days (including partial days) of presence in the U.S. during the current and the two preceding years, it is important that you keep a record of the number of these days you were physically present in the U.S. during each calendar year.

Closer Connection Exception

If you have met the Substantial Presence Test, you will be considered a U.S. resident alien and required to file a U.S. individual income tax return (Form 1040) to report your worldwide income. However, if you were present in the U.S. for less than 183 days during the current year and can demonstrate that you have a closer connection to Canada than the U.S., you may be able to claim a Closer Connection Exception, and be treated as a non-resident of the U.S. The Internal Revenue Service (IRS) will consider the following factors in their determination of a closer connection:

• Location of permanent home

• Location of family

• Location of personal belongings

• Country where your driver’s licence was issued

• Country of residence listed on official documents

• Country where you derived the majority of your income in the current tax year

To claim the Closer Connection Exception, you must file Form 8840, with the IRS by the June 15, 2014 filing deadline (assuming you did not earn wages as a U.S. employee).

Canada-U.S. Income Tax Treaty Tie-Breaker Rules

If you were present in the U.S. for more than 182 days in the current year, you will not be eligible for the Closer Connection Exception and are considered to be a U.S. resident for tax purposes under U.S. tax law. However, if you are also considered to be a tax resident of Canada, you may be able to claim that you are a non-resident of the U.S. by applying the Canada-U.S. Income Tax Treaty Tie-Breaker Rules

(Tie-Breaker Rules). If you maintain a permanent home in Canada and your personal and economic ties are closer to Canada than the U.S., you would likely be considered to be a non-resident of the U.S. under the Tie-Breaker Rules.

Before you fly South

As tax filing requirements and residency determination can be complex, it is important that you consult with a professional tax advisor experienced in cross-border taxation to ensure you are in compliance with any and all tax obligations south of the border. Upon request, your BMO Nesbitt Burns Investment Advisor can introduce you to an external cross-border tax professional for assistance with your personal situation.

 

Contact us for more information. We have three conveniently-located branches in the Ottawa region: Ottawa (West): 613-798-4200, Ottawa (Capital Centre): 613-567-6232, Ottawa (Market): 613-562-6400

 

Having a TFSA works. Get one working for you.

September 13, 2013 11:38 am
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The Tax-Free Savings Account (TFSA) was introduced in 2009 and offers Canadians a unique and flexible planning opportunity to save for financial goals. Contributions to a TFSA are not tax deductible for income tax purposes, however, savings grow tax free. In addition, there is no tax payable when you make a withdrawal from your TFSA.

The savings you accumulate in your TFSA can be used at anytime and for any purpose – it’s completely up to you. Whether you are saving for a new car or a home purchase, your child’s education or your own retirement, a TFSA can help you reach your goal sooner.

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Contributions 

Canadians age 181 and over can contribute $5,5002 annually to a TFSA. Since 2009, the annual contribution limit was $5,000. Effective in 2013, the annual contribution limit has been increased to $5,500. Contribution limits are indexed to inflation in $500 increments. Any unused contribution room, dating back to 2009 or the year you turn 18, carries forward so it can be used in a future year. So if you have never contributed to a TFSA, your contribution limit for 2013 will be $25,500. Your annual TFSA contribution limit is reported on your annual Notice of Assessment from Canada Revenue Agency (CRA). In general, a TFSA is permitted to hold similar types of investments as an RRSP.

Withdrawals

Withdrawals from a TFSA are tax free. An amount withdrawn in the current year will be added to your contribution room at the beginning of the following year. For example, assume a $5,500 contribution is made in January 2013, followed by a withdrawal of $5,900 ($5,500 contribution + $400 gain) in October 2013. On January 1, 2014, an additional $5,900 will be added to your TFSA contribution room.

Other Planning Opportunities

Given the tax free nature of the investment income and flexibility regarding withdrawals and re-contributions, there are many opportunities that you and your Investment Advisor can explore to incorporate a TFSA into your overall wealth management plan.

• TFSAs offer a significant income-splitting opportunity. You can provide funds to your spouse, common-law partner or adult children to allow them to contribute to their own TFSA (subject to their personal TFSA contribution limit). None of the income earned within their TFSA is attributed back to you.

• Consider holding investments in a TFSA that would otherwise be taxed at high rates outside a registered account, such as interest income.

• Since neither the income earned nor withdrawals from a TFSA will affect your eligibility for federal income-tested benefits and credits (e.g. Old Age Security, GST credit, age credit), consider depositing your surplus RRIF or pension income into your TFSA.

Please contact us for more information on how to get a TFSA working for you. We have three conveniently located branches in the Ottawa region: Ottawa (West): 613-798-4200  Ottawa (Capital Centre): 613-567-6232  Ottawa (Market): 613-562-6400

1 Individuals must be the age of majority in their province of residence to open a TFSA with BMO Nesbitt Burns. For B.C., N.S., N.B., Newfoundland., Yukon, NorthWest Territories and Nunavut, the age of majority is 19.
2 The $5,500 annual contribution limit is indexed to inflation and increases will be made periodically in $500 increments.

 

Canadian Bank Stocks: Not Immune to Volatility

July 25, 2013 10:37 am
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Canadian banks often receive positive press for being some of the safest banks in the world, a title that has been earned through the global financial crisis of 2008. However, as a diligent investor, it is important to realize that even well-run businesses carry risks which need to be managed on an ongoing basis.

How Banks Work

A bank is a business that essentially buys and sells money just as a clothing store buys and sells clothes. In its simplest form, a bank receives deposits from customers who would like to earn interest on their savings (i.e. savings accounts & GICs). The interest which depositors earn is the rate at which a bank “buys” its merchandise (i.e. money). The bank then takes that merchandise (the money) and “sells” (loans) the funds at a marked-up rate to people who need to borrow money (i.e. mortgages & loans). In reality, bank operations involve inter-bank lending and reserve ratios which complicate the process but the premise remains the same; banks borrow money at a rate and then lend it out at a marked-up rate to make a profit. The difference between the rate at which the bank borrows money and the greater rate they lend it out at is the spread, or as they call it in the banking industry, the net interest margin which is their profit.

Aug13_Kash_Canadian Banks - Figure 1

A bank’s borrowing and lending rates revolve around the target overnight rate set by the governing central bank (such as the Bank of Canada). Generally, the target rate is low when the central bank wants to stimulate the economy and the target rate is higher when the central bank wants to slow down the economy (i.e. if there is a threat of inflation). While the large Canadian banks engage in more than just lending activities, such as, insurance, wealth management and investment banking, loans remain at the core of their businesses.

Headwind for Profit Growth

When it comes to a bank’s loan practices, a bank can increase its profit in two ways. First, it can increase the profit margin (net interest margin) it makes per loan, or, secondly, by increasing the volume of loans it makes. Currently, Canada is in a low interest rate environment designed to stimulate the economy (target rate is 1.0 per cent). When the target rate is low, banks aren’t able to take a very wide spread between the rate paid to obtain funds and the rate charged when loaning out funds (as seen with the low interest rate on savings accounts and the low interest rate charged on mortgages). In such an environment, banks must increase loan volume to grow their earnings. This is what has occurred recently. The issue with loan growth is that there is a limit to the amount of loans consumers can bear. The Canadian household debt-to-income level is at a record high with debt at over 165 per cent of income. At some point, Canadian consumers will reach their debt ceiling and loan growth for banks will slow. The effects of lean net interest margins will then be more visible on earnings.

Conclusion

Canadian banks are well-run businesses with healthy dividends and operate in a sector with high barriers to entry. That being said, it is important to remind investors that the Canadian bank stocks are not immune to market volatility. One simply needs to look back to 2008 to see that these stocks previously experienced an average decline of 34 per cent of their market value in one year. We don’t believe that this will happen any time soon, but we do believe many investors have become too comfortable collecting dividends and neglecting the volatility that can also come with the securities. With loan growth slowing combined with lean net interest margins, we believe the volatility of the share price for Canadian banks will be on the rise.

Kash J. Pashootan is a Vice President and Portfolio Manager with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The views and opinions of the author do not necessarily reflect those of Raymond James Ltd. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

Mortgage Industry Leaders Offer Insight into the Changing Landscape of Canadian Home Financing

June 28, 2013 10:59 am
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What are the worst-case scenarios? Why are you seeing them? What can be done?

By Gretchen Casey

You’re behind on credit card payments, mortgage payments, property taxes and/or utilities – as a home owner, this is a worst-case scenario. As a mortgage agent, we’re here to evaluate the situation and provide solutions.

Why are people getting into such financial trouble?

This is not something new. One reason why there are mortgage agents is to provide money to those who are turned down by the bank.

But some of the reasons we are seeing more of these situations are:

  1. “Near all-time high levels” of consumer debt – according to TransUnion, the average Canadian consumer debt is $26,935, not including mortgage debt. Canadians use credit cards, which often means high interest rates and fees that become unmanageable.
  2. Local and global economic challenges and job losses, with the jobless rate in Ontario being at 7.3%, down 0.4% in May, 2013. Those who have found new jobs often have to settle for a lower-paying job.
  3. The fear and anxiety felt during times of job instability, job losses and decreased income which then contributes to addictions and habits to “cope” such as gambling, alcohol and drug abuse, co-dependency, shopping addiction; marital problems and break-ups; depression; weight and health issues. “This year, the Canadian Medical Association’s report shows that these tough economic times could also be a serious health hazard for Canadians, “ said Dr. Robert Ouellet, president of the CMA. When you have stress and health issues, money management often suffers.

As a mortgage agent, I am seeing more homeowners seeking financing solutions who have been turned away by their bank due to the government’s mortgage rule changes introduced in June 2012. These included decreasing the amortization on government-backed insured mortgages from 30 to 25 years and lowering the maximum amount when refinancing from 85% to 80%. So what can be done to recover from these difficult situations?

What can you do?

As soon as you are behind on credit cards, property taxes or other bills, if you anticipate you could go behind on your mortgage, then give your mortgage agent or lender a call to see what options may be available. They may offer a “mortgage vacation” for a month or so… or perhaps the option to extend your amortization and reduce your mortgage payment.

Non-profit credit counsellors offer solutions for budgeting and can walk you through step-by-step and there are also companies that you can pay for credit counselling. If you are a do-it-yourself type of person, watch TV shows and read books on getting your finances under control. Great books, tips and resources can be found at many websites, including Gail Vax-Oxlade’s site at www.gailvazoxlade.com. Van-Oxlade is best known from the TV series Til Debt Do Us Part.

If family can help you get up-to-date, that is great. I know of many people who have chosen to buy a smaller home, rent or live with family or friends temporarily. Upgrading your job skills and working together as a family works great, having children involved so they understand the financial challenges. Teens who are informed are more supportive and motivated to get part-time jobs.

If you are already in arrears, have a conversation with your current lender to determine if refinancing for debt consolidation is possible or seek solutions with your mortgage broker. If you don’t meet the criteria at the bank and there is equity in the home, credit unions, trust companies and private lenders offer solutions. These sources can have reasonable rates and fees.

If you are considering a consumer proposal or bankruptcy, I would also seek advice from the other sources already mentioned. Bankruptcies and consumer proposals do have profound effects on your ability to get mortgage financing and if you have a double bankruptcy, it is almost impossible to get mortgage financing.

I am also a very strong believer in the power of your mind, your emotions and your energy system. By taking steps to have a healthy mind, body and spirit, you will add to your ability to find and act on solutions to heal your financial life.

Take the first steps now. I wish you well. Don’t stop believing in your ability to turn things around.

 

Gretchen Casey is a mortgage agent with Mortgage Alliance

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THE U.S. MARKET: Overpriced or Undervalued?

May 30, 2013 2:54 pm
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Since the bottoming of the global financial crisis that took place in 2008, investors’ risk appetite has increased as they have been shifting assets from bonds, cash, and gold to the equity market. With the U.S. economy showing signs of improvement, many market watchers are looking south of the border for investment opportunities. As American stock markets have swiftly moved up since the start of the year, investors are wondering if they have missed the opportunity. We look at the valuation and fundamentals of the S&P 500 index to determine current health of the U.S. economy, as the benchmark represents 70 per cent of the market’s total value. Closing at $1,579.96 mid-April, the index has reached an all-time high – a level it has encountered only twice before. The two market tops in 2000 and 2007 marked an end to each respective rally. This has brought up the question whether the U.S. market has reached its peak or if there is still room for growth. Simply looking at the index level and comparing to such levels as those reached in 2000 and 2007 is not enough. One needs to compare the underlying metrics.

Valuation

With price to earnings (P/E) ratio reaching 18.1, valuations seem high as the number starts to signal an overpriced market. The index rose nearly 10 per cent from January to March, stirring up questions whether this growth will continue and if further highs will be reached. When looking at the P/E ratio, it is important to note that the earnings have grown just as fast. The increase in price and valuation is supported by a strong growth in corporate earnings, above average unemployment levels that are keeping inflation low, and most importantly the lack of a underlying housing or technology bubble that have nourished such high valuations in the past.

Fundamental Strength

The S&P 500 is stronger fundamentally than it was during its previous highs in 2000 and 2007. This time we see a higher dividend yield that is supported by strong cash flow per share of $406.26, versus $140.50 and $353.4 in 2000 and 2007 respectively. Based on current earnings and book value of assets, U.S. stocks are cheaper today than they were at the previous market tops, as can be seen in Figure 1. With a debt to assets ratio lower than it has been during those previous highs, earnings and valuations are driven less by leverage, but instead are sustained with the corporate equity and assets.

Diversification

The strength is more evenly balanced throughout the index, with no single sector exceeding 19% of the overall market weighting of the index. Out of the 10 sectors included in benchmark, 7 have a weighting of at least 10 per cent. S&P 500’s fundamentals are well diversified. Such dispersion enables the index to better digest weakness from even its largest sector.

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Conclusion

There is evidence that the U.S. economy is improving with consumer debt lower than in recent years, a housing market that is stabilizing  and unemployment slowly declining. Regardless, pull backs are healthy and will occur during the time of growth and recovery. This recovery will not be a straight line up and we will see disappointing periodic economic news. It is during such times that investors should consider taking advantage of the opportunity to enter the U.S. market. Based on historical average P/E ratio the index needs to rise to $1,650 to match past pricing, an increase of 7 per cent above its current level. When comparing the index to itself, stocks look compelling. With the upside potential for the U.S. markets, and strong fundamentals to support current and continued growth, it still makes sense to evaluate whether American equities should be part of your investment strategy and portfolio.

Kash J. Pashootan is a Vice President and Portfolio Manager with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The views and opinions of the author do not necessarily reflect those of Raymond James Ltd. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

 

Four Pillars to Financial Peace of Mind

April 2, 2013 11:59 am
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By Kash Pashootan

Achieving success with your financial plan is much like building a house. It requires a strong foundation to carry the weight of your financial goals. A complete financial plan will provide you with integration of retirement planning, estate planning, investment management and tax planning. These four pillars must not only be initially developed, but also require ongoing commitment from your advisory team to remain up to date, or it will quickly lose its relevance.

Retirement Planning

Whether you are working towards retirement or already retired, it is important to consider your financial future and achieving your desired lifestyle. For those who are working towards retirement, generating in-come of 60-70 per cent of your working years is often sufficient to maintain your current lifestyle. Planning will answer key questions. Will I have enough to retire? Will I be able to do the things I want to do during my retirement years? For those who are already retired, this planning will help put into perspective your withdrawal rate relative to the amount of assets you have to help answer the question that preoccupies many people. Will I outlive my money?

Estate Planning

Estate planning is another key pillar in your plan. It structures how the transfer of assets will take place. A common misconception is the need to have millions in your estate before considering estate planning. Wrong. If you have something of value that you would like to pass on, or someone you’d like to protect then estate planning is of value to you. A testamentary trust, which comes into effect upon the death of the settlor, may present you with distinct benefits. It offers a number of planning options as it can reduce probate fees. It offers protection from creditors and essentially creates a new taxpayer, so income from one’s inheritance is separate from other income. Because of the legal and tax details involved with trusts, professional advice is essential.

Investment Management

Knowing your future goals and financial objectives will shape your personalized investment strategy. By working closely with your Portfolio Manager, you build an investment portfolio custom-tailored to your specific goals, without the need to take on unnecessary risk. Your wealth plan will clarify the asset mix in your portfolio that will achieve optimal returns and appropriate risk, based on your time horizon. Fee-based accounts are something to consider, as they replace transaction commissions and administration costs with a single annual fee based on the value of assets under management. With fee-based investing, your interests are better aligned with that of your Portfolio Manager. Moreover, annual management fees for non-registered accounts are tax deductible in the year they are incurred.

Tax Planning

Integrating a tax strategy into every step of your financial plan is important because it is the after-tax dollars that matter. Tax planning should not be done in isolation. It should be driven by your overall financial goals and in line with your total financial plan. Tax-smart investing strategies can improve net investment returns, minimize taxes and save investors money. The process entails various types of tax strategies depending on your unique financial situation. For those who are retired, this is especially key to ensure income splitting not only for today but also for the future. Investors often have several investment accounts, ranging from non-registered accounts, corporate accounts, TFSA, RRSP, LIRA. A tax strategy will illustrate how much to withdraw from each account to achieve your monthly income requirement and remain as tax efficient as possible.

A solid foundation is important in achieving your long-term financial goals and desired lifestyle. Without integration of the four pillars, your financial plan will lack the support it needs to withstand the changes in the economy, stock market, and most importantly life changes. Choosing an advisory team that incorporates this integrated planning is essential to long-term success. Management fees in Canada are among the highest in the world and so ensure for those fees paid you are receiving ongoing integrated planning.

 

Kash J. Pashootan is a Vice President and Portfolio Manager with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The views and opinions of the author do not necessarily reflect those of Raymond James Ltd. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

Adding Value to Your Portfolio With Active Management

January 21, 2013 12:20 pm
Kash

By Kash Pashootan

As financial market conditions continue to be volatile due to global economic headwinds, there has been much talk recently about a recurrent debate: does active or passive portfolio management deliver better results. There is a view held by some that the average portfolio manager will underperform index benchmarks, suggesting that it is best to ride the market with a passive management approach by investing in index tracking exchange traded funds. However, active and passive management do not need to be mutually exclusive, as both can be complementary in forming a personalized portfolio strategy. The question becomes where and when is one approach more appropriate than the other. Where portfolio managers add real value is in determining which style is best to use in light of inherent merits and drawbacks of each investment approach and the objectives of individual investors.

Index Distortion and Negative Compounding

Over the past several years markets have been characterized by periods of extreme volatility. Active managers do well by focusing on company fundamentals rather than treating equity as an asset class. During periods of lower return, owning an index carries more risk as market cap-weighted indices are distorted. In extreme market conditions, unprecedented valuations of stocks and inflated market caps cause sector weighting to rise, thereby eliminating diversification. This was the case in late 1990s when inflated valuation of tech stocks caused the technology weighting in the Russell 1000 Growth Index to balloon to 44 per cent, only to endure the sector’s loss of 35 per cent in 2000 as the tech bubble burst. Index distortion can be observed today, as the weighting of Apple Inc. has increased to 4.44 per cent of the S&P 500 Index. Market cap-weighted indices are inherently momentum driven, allocating to stocks that have recently done well and are now overvalued. It is at this time that active managers take advantage of the opportunity to make a diversification judgment by trimming overvalued sectors and investing in stocks trading at rarely seen valuations. The ability of active management to preserve capital in down years adds greater value than outperforming in up years due to effects of negative compounding. Conversely, passive investment management does not offer any down-market protection. In addition, index funds will inevitably underperform the benchmark due to embedded fees. With no capital protection during periods of negative market performance and the compounding of embedded fees, a passive strategy can increase the risk of capital erosion and when losses are incurred the return needed to just regain your starting capital can grow significantly.

Time Horizon

One of the key determinants in overall portfolio strategy selection is the duration that assets are invested and not withdrawn. Short-term investments of one to three-year periods are subject to market noise. In this context, a passive approach can, in certain market conditions, provide a quick and effective way for investors to gain exposure to the market, steering clear of high transaction costs. In contrast, to realize true value of active investment management the holding period must allow for at least one full market cycle of three to five years. Studies show that active management can accrue benefits and add value over the benchmark as the time horizon is extended through market cycles.

Added Value

In the investment management industry, active management comes in many forms and with managers of varying skill. There is a vast difference between average and above-average managers, with a direct impact on portfolio performance. Top managers have been found to consistently add value in both up and down markets with a disciplined, repeatable investment process. For investors, due diligence is a critical part of portfolio manager selection and in many ways it is analogous to picking a good stock. The account fee structure must also be considered. Commission accounts carry inherent conflict of interest by compensating portfolio managers on a per trade basis. In comparison, fee-based accounts align the interests of the client and the portfolio manager. By charging a fee on total assets under management, the structure ensures that both parties have equal interest in growing the capital.

When choosing an appropriate portfolio management strategy, investors need to consider their expected time horizon, tax sensitivity, and ability to tolerate performance variation. A portfolio manager can help you weigh the merits and drawbacks of each strategy, while taking into account your investment objectives to determine which approach is most appropriate for you.

 

Kash J. Pashootan is a Vice President and Portfolio Manager with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The views and opinions of the author do not necessarily reflect those of Raymond James Ltd. Member Canadian Investor Protection Fund.

What It Takes to Be a Top Money Manager

May 30, 2012 4:04 pm
kash

Business Profile by: Dan Donovan and Dalal Saikali

Kash Pashootan is calm and focused. It’s just before 8:00 a.m. when his team’s morning meeting comes to a close. At 8:45 a.m. the team will reconvene to review the latest news from the global capital markets, ensuring they are well informed before North American stock exchanges open at 9:30 a.m. That leaves 45 minutes to uncover as much as possible about one of Canada’s leading financial advisors and his practice.

Kash Pashootan’s office looks and feels like what you would expect to see on Bay Street. It’s a large corner office with two exterior walls of windows overlooking Queen Street in downtown Ottawa. Two flat-screen TVs jut out from another wall, displaying a silent, continuous stream of business news. A dark, cherry wood u-shaped desk occupies one corner with two computer monitors mounted on the wall above it. Crowning them is a striking piece of abstract art. On the other side of the office is a seating area bounded by a plush greyish-blue carpet. There is a modern black leather couch, two concave black leather chairs, and a coffee table adorned with a wood gathering bowl. Between the chairs is a small table with a stunning amethyst geode. The office is imposing and inviting. When asked who decorated the office, Pashootan answers directly, “I did.” It’s not surprising. He is impeccably dressed and groomed. His deep blue three-piece suit and crisp, French-cuffed white dress shirt are accented by a soft blue tie, colourful pocket square, and cufflinks. A distinctive watch peers from the left cuff of his shirt and his shoes are neatly polished. To complete the ensemble, his black hair, showing the first signs of grey on the sides, is meticulously combed and parted to the side.

Kash Pashootan has over a decade of experience in the financial services industry and certainly looks the part of a seasoned money manager. However, in the competitive, demanding, and results-driven investment management profession, looking the part only gets you so far. What sets Pashootan apart are his results and track record. He has established a reputation with high-net-worth clients as a conservative practitioner with an in-depth understanding of the capital markets. Though the youngest financial advisor in his office, he has built the largest practice by attracting, retaining and forging strong relationships with clients. In 2011, Pashootan’s achievements were recognized by his firm when he was appointed by the CEO of Raymond James Ltd. to the exclusive Chairman’s Council – the first and only financial advisor in Ottawa to receive this honour. Success comes at a price, though, and for Pashootan it has been hard earned. “Kash and his team are the first to arrive at the office and the last to leave,” says Daniel MacInnis, the manager of Raymond James’ Ottawa office. “He has a tireless work ethic and is a consummate professional.”

Kash Pashootan. Photo by: Jordan Craig

In 2009, Pashootan founded First Avenue Advisory of Raymond James Ltd. His practice provides active, pension-style investment management services through a non-commission-based model. “Our clients, who are medical professionals, current and former executives, corporations, and high-net worth families, have unique needs and have outgrown mutual funds and structured products,” Pashootan explains. “We work personally with each of our clients to develop a portfolio strategy tailored to their goals and to protect their hard-earned wealth.” With a team of associates to support him, Pashootan focuses on portfolio strategy, risk management and developing customized solutions for his clients. He regularly speaks with company executives, portfolio managers of major funds and lead analysts to gauge the pulse of the market and identify investment opportunities. Part of the job involves short trips to major financial centres such as Toronto, New York and Hong Kong, to gain insights from the ground level and meet with some of the brightest minds in the business and financial world. His commitment to staying informed, his prudent investment management approach and his ability to protect clients’ capital have earned him the trust of tax, accounting and legal professionals at top national firms. First Avenue Advisory clients have access to this network of professionals to ensure they receive expert advice for all aspects of their financial strategy.

After discussing his practice, we shift over to the global economy and capital markets. Pashootan methodically breaks down their complexity by evoking an image of the global financial landscape that can be understood by even a novice investor. His ability to simplify complex financial issues into layperson’s terms has landed him on live national television were he comments on these issues.

While Pashootan loves his work, he makes a point to give back to the community. He is a mentor for the Capital Markets Mentorship Program at the University of Ottawa Telfer School of Management and has taken the lead in organizing the annual capital markets competition at the university. In the community, he supports several national and local charities and volunteers annually at the the Ottawa Snow Flake Ball, which raises funds to fight Crohn’s, Colitis and Colorectal Cancer, and to support the Children’s Hospital of Eastern Ontario (CHEO) Foundation.

To recharge, Pashootan enjoys entertaining at his home with his family and friends. He also maintains an active lifestyle, takes extended bike rides in Gatineau Park and collects art. Recently, a special person in his life introduced him to meditation, which he is incorporating into his daily routine. “Learning to meditate has been challenging, but it’s powerful,” Pashootan says. “It helps me stay focused and present.”

When our meeting began, I was struck by Pashootan’s refined appearance, intensity and commanding presence. Now that it’s over, I’m taken with his friendly and pleasant manner. As I leave, I glance back to see his associates join him in his office for their 8:45 a.m. meeting – like clockwork.

The European Debt Crisis Decoded

February 10, 2012 12:42 pm
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If you’re tired of hearing about and the European sovereign debt crisis, you’re not alone. It has been hanging over the global financial markets for well over two years now and progress on developing a comprehensive solution to address it has been painfully slow. German Chancellor Angela Merkel, one of the key architects working on a solution, even likened solving the crisis to running a marathon. For spectators of this grueling event, such as Canadian investors, the crisis has not only been tiresome due to its length, but confusing because of its complexity.

Background

The European sovereign debt crisis is rooted in three elements. First, there is the amount of public debt carried by the 17 members of the euro area (countries that have adopted the euro). Second, there is the risk of Greece defaulting on its debt obligations and thirdly there is the issue of European bank solvency. The ratio of public debt to gross domestic product (GDP) is an indicator that gauges the sovereign country’s fiscal health and the ceiling for this ratio for euro area countries is 60 per cent, as agreed upon in the Stability and Growth Pact in 1997. However, the pact has not been respected or enforced. As the table below shows, countries are well above the ceiling and some, such as Italy, Ireland, and

Greece, even surpass 100 per cent. If countries in Europe continue to run budget deficits and increase their already massive debt load, it will become increasingly difficult for them to grow their economies, to borrow money at sustainable rates (yields on their bonds), and to repay their debts. Greece, the most indebted country in the euro area, has already succumbed to its debt. The country has needed to implement austerity measures, required bailouts, and even written down its debt by 50 per cent. If other sovereign nations in the euro area wind up in the same situation as Greece, the solvency of European banks would be threatened, since they hold large amounts of sovereign debt.

Impacts

Given the interconnectedness of the global financial system, the impacts of the unresolved debt crisis in Europe would be significant. The core risks include default among euro area countries, European bank failures, contagion within Europe and potentially outside the continent, contracting and freezing of credit markets and global recession. In addition, if a concrete solution is not implemented in the short term and the situation continues to deteriorate, sovereign credit ratings could be downgraded, which could raise borrowing costs for countries and deepen the crisis. At the beginning

of December, Standard & Poor’s placed 15 members of the euro area, including Germany and France, on “credit watch negative”, a warning they could be downgraded in no more than three months.

Current State

Despite seemingly countless meetings between global and European leaders there still isn’t a solution. Even more troubling is that leaders have mainly focused on plans to address the longer term issue of fiscal union. So far, they have essentially agreed to put a new pact in place by March 2012 that will restate and put procedures in place to enforce the criteria in the 1997 Pact. The criteria include annual budget deficits no higher than 3 per cent of GDP and a national debt lower than 60 per cent of GDP. However, even if a new pact is agreed upon, it would take years for countries to reduce their debt from current levels.

Although, the steps taken by leaders to move towards fiscal union are positive, the actions taken to address the immediate crisis of debt and confidence have so far been limited and insufficient. There has been much talk of the need for a so-called emergency funding ‘bazooka’ to combat the crisis, calm markets, and restore confidence, but agreement on putting this in place has been elusive. At present, the marathon’s finish line still appears to be far in the distance. Therefore, even though tired and disillusioned, investors should not turn a blind eye to the developments in Europe. I believe markets will continue to remain volatile and “buy and hold” will be less effective. More than ever, it is important for investors or their advisors to take an active approach to managing investment portfolios.

Kash J. Pashootan is a Financial Advisor with Raymond James Ltd. The view and opinion of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. Member – Canadian Investor Protection Fund

Top of Investors’ Minds: The exponential rise in the price of gold.

October 10, 2011 12:46 pm
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By Kash J. Pashootan

Whether you’re an investor or on the sidelines watching the markets, Canadians want to know, seemingly more than ever, how global financial events impact their financial security. The underlying desire to understand the impact stems from the transition of our country’s demographics. Baby boomers, people born between 1946 to 1965, are entering, thinking about, or rapidly approaching retirement. While there are many events to address, the steep and continuous rise in the price of gold, regularly reaching new all-time highs, has been one of the stories grabbing both financial and world news headlines. As a result of the increased attention in the media and the rapid increase in price, many investors want to know if there is still an investment opportunity, if they’ve missed the opportunity, or if there is a speculative gold bubble that will soon burst.

When investors evaluate whether gold should be part of their portfolio, and if so, what percentage, there are several market trends and developments they should keep in mind, which include the devaluation of fiat currencies and the increasing demand for gold from China.

Devaluation of Fiat Currencies

Governments around the world are devaluing fiat currencies by increasing supply, i.e., printing more paper money. They are turning to this strategy to intervene in foreign exchange markets and to deal with severe economic slowdowns and mounting liabilities. The United States, in particular, has pursued aggressive strategies and policies to increase the supply of money to deal with its government debt, budget deficits, and unfunded future liabilities. Consequently, there is now global concern about a potential U.S. dollar crisis and ultimately, its status as the world reserve currency.

The monetary policy actions taken by world governments combined with the uncertainty surrounding the U.S. dollar has forced investors to seriously question the ability of fiat currencies and government bonds to hold value. Therefore, investors are now seen looking to gold as a safe harbour, store of value and alternative monetary asset.

Increasing Demand for Gold from China

China, the second largest gold consuming market in the world, has a historical and cultural affinity for gold. It’s considered the colour of the emperors, viewed as a symbol of status, and given as a traditional gift for birthdays, Chinese New Year and weddings. And, as income and wealth levels have increased in China, the effect has been a rising demand for gold jewelry. In fact, the demand for it has more than doubled in the last seven years, from 224.1 tonnes in 2004 to 451.8 tonnes in 2010.

Jewelry, however, is only part of the story. The increasing demand for gold in China is also due to the lifting of gold ownership restrictions and opening of the Shanghai Gold Exchange in 2001, which have resulted in increased investment demand for gold and the creation of gold savings accounts in China. Recently, the investment demand has been further stimulated by the global devaluation of currencies and the use of gold investment as a hedge against fear of inflation in China.

The figure (left) shows that since 2001, despite the rising price of gold, demand has increased by an average of 14 per cent per annum. From 2006 to 2010, the increase was even more dramatic and based on current data, this trend has continued in 2011.

As global financial events continue to shift markets and dominate headlines, investors, especially those from baby boomer generation, will want to know how they impact their financial security and retirement. The extraordinary rise in the price of gold is part of the complex web

of events that shape the market, and the devaluation of fiat currencies and increased demand for gold from China are two of the underlying market trends and developments affecting the price of gold. While investors may be hesitant to invest in gold given the current price, the analysis presented above shows that it still makes sense to evaluate whether it should be part of your investment strategy and portfolio.

Kash J. Pashootan is a Financial Advisor with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The view and opinions contained in the article are those of Kash J. Pashootan not Raymond James Ltd. Raymond James Ltd. Member- Canadian Investor Protection Fund.

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