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Author: TWA40 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 63849  
Subject: Canadian Investing FAQ II Date: 5/6/2002 5:16 PM
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The Motley Fool—Canadian FAQ (Frequently Asked Questions)

Tecmo wrote the last FAQ, and there's nothing wrong with it except for the fact that it's 3 years old now.
http://boards.fool.com/Message.asp?id=1050002001364000

Please recognize that any information available on these boards is subject to change, and superficial at best. You alone are resonsible for your financial well being, and it pays to be diligent and skeptical about everything you read. Treat the information available here on the Canada Board as a starting point only. Always follow up with your own due diligence.

The Canadian General Board is a community of mostly Canadians interested in investing in mostly Canadian stocks.
But we also discuss U.S. stocks, current events, and other off topic items. If you're new to the board, go ahead and ask questions, but try to do a little reading first so you don't ask something that's been asked 100 times before. In general, you'll find that you get careful and courteous responses if you ask something after putting in a little bit of due diligence of your own. In other words, share what you know about a particular company, and why you're interested in investing in it. You'll get a much better response than if you simply ask a one-liner question: “What do you think of Nortel?” [Actually, come to think about it, you might get quite a heated response from that simple question].

We often come to agreement, but we also disagree all the time, and many people will disagree with some of my interpretations in this FAQ. But if you disagree with someone on the discussion boards, try to constructively criticize their ideas, rather than personally attack the author.


Table of Contents:


I Canadian Exchanges
II Canadian Brokerages
III Canadian Index Funds
IV Canadian Mutual Funds
V Foolish 4 / Mechanical Investing Strategies
VI Internet Resources for Canadian Investors
VII Registered Accounts (RRSP, RRIF, and RESP)
VIII Investing in America
IX Taxes
X Miscellaneous

I. What are the major Canadian stock exchanges?

The Toronto Stock Exchange (TSE) is Canada's premiere stock exchange, which handles most of Canada's large capitalization companies (www.tse.com). However, the TSE also includes an inordinate number of penny stocks. Don't equate it with quality in the same way as you would the NYSE.

The Canadian Venture Exchange (TSX) resulted from merging the old Vancouver, Alberta, and Winnipeg exchanges. It has since been acquired by the TSE and shares the same web-site. If you're into gambling on penny mining stocks or wildcat drilling operations, this is your lair.

The Montreal Exchange (http://www.boursedemontreal.com/accueil_en.php) handles all options and derivatives trading in Canada. Currently, options are available on about 75 Canadian stocks and another 15 indices or sub-indices.

Be aware that most large Canadian corporations (e.g. Nortel, Royal Bank, Barrick's Gold) are cross-listed on American exchanges. If you'd prefer to own Canadian companies denominated in U.S. dollars, check for dual listings on NYSE, AMEX, or NASDAQ.

II. What are the best discount brokerages for Canadian investors?

Canada doesn't have any deep discount brokerages like E*Trade, Datek, or Ameritrade with $8 to $12 market orders. The best you'll do for now in Canada is C$24-$29 per order. For U.S. stocks, you'll pay the same amount, but in U.S. funds; i.e., about C$45 per transaction—which seems akin to bank robbery (and is). Legally, you cannot have an account with a U.S. brokerage, although some Canadians circumvent this by using a U.S. mailing address.

In the Globe & Mail's latest survey of Canadian brokerages, TD Waterhouse ranked first, followed closely by Bank of Montreal's InvestorLine. The other major banks (CIBC, Scotia Bank, Royal Bank) all have decent products. There are also a couple of independents, including E*Trade Canada and eNorthern (currently the cheapest).
http://www.globeinvestor.com/series/brokersurvey2001/index.html

Norm Rothery also provides information on Canadian brokers at his site: http://www.stingyinvestor.com/SI/brokers.shtml

Disclaimer: I'm a long-term TD Waterhouse customer, but I'm certainly no advocate for them. No matter who you use, they will piss you off at some point. I recommend taking Casey's (wcaseym) advice and making one of your core stock holdings the bank or brokerage where you do business. That way, at least, you can comfort yourself that they're ripping off all the other customers too, and thereby earning you—the shareholder—a healthy profit.

III. What index products are available for Canadian investors?

The Toronto Stock Exchange (TSE) has recently restructured its major indices. The S&P/TSE 60 debuted in December 1998; it is the large capitalization index that replaced the older TSE 35 and TSE 100. The historical benchmark, the TSE 300, has just been replaced by the TSX Composite Index. The new index includes some minimum trading volumes and trading prices ($1) that the old TSE 300 didn't have. Changes to the indices are pre-announced on the TSE web-site.

You have two major options as a Canadian index investor. Most mutual fund companies have index funds available. According to John Bogle (founder of Vanguard), an index investor should focus exclusively on low management-expense ratios (MER). The lowest rate currently available is from TD Bank's Canadian Index e-fund, with an annual MER of just 0.30% (this one has to be purchased over the internet: http://tdefunds.com/eng/index_static.html). If you're not into investing online, TD's conventional index fund has a 0.85% MER. Royal Bank's Canadian Index Fund has a 0.59% MER, which is the lowest conventional rate. Mutual funds are a good choice if you're dealing with smaller amounts of money or want to dollar-cost average with several purchases per year.

You can also buy exchange-traded funds (ETF's) that trade over the counter on the TSE (ETF's were actually “invented” by the TSE back in 1991). Barclay's has a TSE 60 index that trades with ticker XIU (MER = 0.17); it also comes in a “capped” version that seems unnecessary now that Nortel no longer accounts for more than a third of the TSE's entire capitalization. You can also buy the TSE mid-cap index (XMD) or sector indices including financial services (XFN), oil & gas (XEG), gold (XGD), and information technology (XIT). Check out http://www.iunits.com/english/news/articles/2002/240102.html for more information on Canadian ETF's. Dow Jones has an extremely low MER fund (0.08%) based on the DJ Canadian 40 (DJF), but it's not a very widely used index. TD Asset Management also has ETF's based on the TSX, including broad categories based on value (TAV) or growth (). ETF's have lower MER's than index funds, but realize that it will cost you $24-29 for each purchase and each sale, hence they are more applicable for large holdings (> $10,000) or longer holding periods. If you're ever interested in selling covered calls against your index holdings, the Montreal Exchange has options available for most ETF's.

IV. Are there any good Canadian mutual fund companies?

No.

But you probably don't have a lot of choice in the matter.

If you have $50,000 or more to allocate to safety and income, you can invest directly in bonds or T-bills, but for lesser amounts you're probably better off with funds. For bond and money market funds, you should focus primarily on minimizing fees, and secondarily on staying away from managers who try to boost yields by investing in junk (lower grade debt with a higher risk of bankruptcy). A great place to screen for Canadian mutual funds using a variety of criteria (including MER) is at the Globe & Mail's mutual fund site: http://globefunddb.theglobeandmail.com/gishome/plsql/gis.analyser

For money market funds, TD is the only major bank that has MER's of < 1%. Bissett, Scudder, and HSBC also have funds with < 1% MER. Beware of new funds with “teaser rates” that will increase after an initial low-fee period. For bond funds, TD Canadian Bond and Canadian Government Bond Index are a couple of the better bank-offered funds (and also check out their newer e-funds). Altamira, Bissett, and Sceptre also have good no-load bond funds. Philips, Hagar & North (PH&N) has one of the best bond funds going, but it has a $25,000 minimum investment.

There are a few good equity funds out there too. At the top of the heap is ABC Fundamental Value (19.9% return over previous 10 years), but it has a minimum investment of $150,000. But you can always check out fund manager Irwin Michael's value investing web-site at http://www.valueinvestigator.com/ for free. PH&N Dividend Income is another great fund, but it has a $25,000 minimum investment. Bissett Canadian Equity, Bissett Small Cap Fund, and AIC Advantage also have great long-term records. However, be prepared for fairly oppressive MER's on these funds (>2% on all except Bissett Cdn Equity and PH&N).

V. What about applying the Foolish 4 or other mechanical screens to Canadian stocks?

For screens based at least partly on dividend yield (e.g. Michael O'Higgin's “Beating the Dow” as applied to the TSE), check out the companion TMF board called “Beating the TSE”, although it's been pretty quiet of late: http://boards.fool.com/Messages.asp?bid=100181

Also, check out Fool60's personal web-site on value-based methods for beating the TSE: http://www.canadianvalue.ca/

If your interest in this topic stems from Tom and Dave's book “The Motley Fool Investment Guide”, you should realize that TMF pulled the plug on the Foolish 4 quite a while ago: http://www.fool.com/portfolios/discontinued/fool4.htm

VI. Recommended Internet Resources for Canadian Investors:

Portfolio Managers and Watch Lists: http://www.globeinvestor.com/ (2nd tab on top)
Charting (for BigCharts, insert “ca:” in front of Canadian tickers): http://bigcharts.marketwatch.com/reports/default.asp?report_country_code=ca
Annual Reports and Official Documents: http://www.sedar.com/issuers/issuers_en.htm
Business News: http://www.globeinvestor.com/
http://www.nationalpost.com/
http://www.fin-info.com/
Others: http://www.canadianmoneysaver.ca/index.htm
http://www.ticonline.com/
http://www.ndir.com/
http://www.quicken.ca/


VII. Registered Investment Accounts

RRSP (Registered Retirement Savings Account)

There has been a lot of debate on this board over the last 5 years as to whether an RRSP is even worth having. An RRSP provides two main benefits: 1) contributions are deducted from your taxable income and therefore reduce your annual tax bill, and 2) investment gains are tax-deferred until they are withdrawn from the RRSP. But there are also two major shortcomings: 1) all of your investment gains (plus your original contributions) are eventually taxed as ordinary income when they are withdrawn (rather than the lower capital gains rate which might otherwise apply), and 2) your investment options are restricted (no more than 30% foreign content, no short selling, no naked options).

In general, if you are in a high marginal tax bracket and you won't need the money for a long time, you'll benefit greatly from an RRSP. But this assumes that you also invest your RRSP-based tax savings in a non-registered account. You can't directly compare $10,000 invested in an RRSP to $10,000 invested in a cash account, because the $10,000 in an RRSP only costs you about $5,000 in after-tax dollars.

But if you're currently in a low tax bracket, invest primarily in non-Canadian stocks, invest primarily for capital gains, practice long-term buy-and-hold investing, but don't intend to be in a lower tax bracket at retirement, then you might do just as well (or even better) with a non-registered account. In addition, if you think you might be moving permanently to the U.S. sometime soon, it may not pay to contribute to your RRSP.

The answer to “which is better” isn't simple and will require a lot of scenario planning to get an answer that is right for you. But the guidelines listed above should provide a reasonable rule-of-thumb for which is likely to be better for you. My advice: “If in doubt, max out your RRSP”.

Foreign Content Restrictions in an RRSP
Foreign content is based on book value, not on market value. Recent changes have boosted foreign content restrictions from 20% to 25% to the current level of 30%. If you're interested in boosting foreign content in your account, you can play trading games to reduce the cost base of your foreign holdings if they've declined since you bought them. For example, if you have 100 shares of WCOM purchased at $55, now at $2, it could be sold and bought again to free up US $5,300 of foreign contribution room. Similarly, if you're carrying Loblaws with a cost base of C$20, but it's C$55 now, buying and selling this Canadian holding will boost the book value of your domestic content, creating additional foreign content room.

You can also boost your foreign content room above 30% by buying shares in labour-sponsored venture capital funds (LSVC). These qualify for the normal RRSP tax-break, plus an additional 15% tax break from the federal government and another 15% from your province (if it qualifies). But, you'll have to hold this POS for 8 years before you can sell it, and the average MER on these funds is about 3.5% per year. Needless to say, they have little performance outside of the massive tax breaks. I don't recommend them. For more info on these critters, select “Labour sponsored” under asset class at the G&M's fund filter: http://globefunddb.theglobeandmail.com/gishome/plsql/gis.analyser

RRIF (Registered Retirement Income Fund)
By the end of the calendar year in which you turn 69, you have to convert your RRSP to an RRIF. At that point, you're required to make minimum annual withdrawals and those withdrawals will be taxed as if they were ordinary income. However, your investment gains within a RRIF will continue to accrue in a tax-deferred environment.
https://www.tdcanadatrust.com/rifsandrios/faq_rif.jsp

RESP (Registered Education Savings Plan)
By investing in an RESP, you can amass funds for your kids' (or grandkids') post-secondary education in a tax-deferred environment. But unlike an RRSP, you can not deduct RESP contributions from your taxable income. However, you won't have to pay any taxes on investment gains until the funds are withdrawn. Moreover, at that time they'll be taxed in the hands of your son or daughter, presumably at a much lower rate. The major benefits of an RESP are three-fold: 1) tax-deferral on investment gains, 2) tax-efficient transfer of wealth to your child or grandchild, and 3) the CESG grant. The CESG grant is a 20% match from the federal government on new deposits of up to $2,000 per child per year (i.e. $400 per child per year).

The only real drawback of an RESP is that your child might decide not to pursue post-secondary education. But be aware that most institutions qualify, including colleges and trade schools. Your risks also go down if you have more than one beneficiary per account—then you can use the money on whoever continues on. You can also transfer the RESP funds to a spousal RRSP, provided you have enough unused contribution room. As a worst case scenario, you can at least get your original principal back and donate the investment gains to your alma mater.

Beware of scholarship-based plans where the money resides in an investment pool. These plans have less flexibility and lower potential returns, and you'll be out of luck if your child doesn't attend university.

TD Waterhouse has self-directed RESP accounts that are free if you also have a self-directed RRSP account, but otherwise they cost $50 per year. National Bank, Scotia Bank, and Royal Bank all have self-directed RESP's with $25 annual fees. If you only want to invest in mutual funds, you can find no-fee accounts at most major banks.

VIII. Investing in America

Give us your poor, your destitute, and...oh yeah, your money

In addition to higher commissions from U.S. stocks (i.e. you'll pay $29 U.S. rather than $29 Cdn), you'll suffer the added indignity of paying for a currency transaction every time you transfer from Cdn to U.S. funds and back again. At a 2-3% spread on currency transactions, this cost is certainly not trivial. If you frequently invest in U.S. stocks, you should probably set up a U.S. $ denominated account through your Canadian brokerage so you only have to pay for a single currency conversion (most, if not all, Canadian brokerages have U.S. $ accounts).

Some board members with Cdn $ accounts have reported that if they sell a U.S. stock and buy another one back on the very same day, they can avoid paying for a round trip currency conversion. But they don't automatically get this break—they have to phone their broker and specifically request it.

If you buy income or dividend producing companies, be advised that the IRS (U.S. Internal Revenue Service) will automatically withhold 15% tax from your dividend payments. You can recover some or all of this when you file your Canadian taxes (long-form Schedule 1).

Those are some of the major drawbacks. The perks are much greater liquidity and better quality online resources (e.g. Yahoo's company profiles, insider trading, institutional holdings, short positions, etc.). Some would further argue that investing in U.S. companies can spare you the agony of watching your Cdn denominated assets sink into oblivion vis-à-vis the U.S. dollar, but not me—I'm contrarian to the bone.
http://futures.tradingcharts.com/chart/CD/M

IX. Taxes

Inside an RRSP or RESP you can ignore the tax consequences of investing, but outside of registered accounts you'll want to pay attention to your after-tax rate of return. If you're in a high tax bracket in a high tax province (i.e. marginal tax rate of about 50%), you'll pay about 50% tax on interest income, 37% on dividend income, and 25% on capital gains. So obviously, $100 in capital gains is worth more than $100 in dividends or interest payments, all other things being equal.

Gains or losses from naked (uncovered) options and short sales are treated as interest income (see guidelines in IT-479R), but gains from selling covered calls qualify for capital gains treatment. The dividend rate only applies to Canadian corporations—dividends from foreign (including U.S.) companies are treated as interest income. Canada doesn't have a minimum holding period for capital gains (in the U.S. it's a year and a day for long-term capital gains rates, else you pay short-term [= higher] tax rates). Capital gains do not accrue until you sell, so by practicing long-term buy-and-hold investing you effectively obtain an interest-free loan from Rev Canada—until you sell, that is.

Many REITs (Real Estate Investment Trusts) and resource-based income funds (i.e. any trust units with a .un ticker extension like SMU.un) provide extremely high “dividend” payments, but these are not classical dividends based on after-tax profit. A large part of the payment is based on return of capital (ROC). The ROC portion of these payments are not treated as taxable income, but you have to keep track of these payments and adjust your purchase price for the return of capital to calculate your actual capital gain (or loss) when you sell. For example, you bought SMU.un at $10.00 three years ago, and have received $3.90 in “dividend” payments since then. According to annual tax information provided by your broker, this $3.90 included $3.50 in ROC and $0.40 in interest. Your adjusted cost base is therefore $10.00 - $3.50 = $6.50. If you sell now for $14.00 per share, your apparent capital gain is $4.00, but your cost-adjusted capital gain is actually $7.50, and it's this latter gain on which you have to pay capital gains taxes. So trust units don't really provide tax-free income—they provide tax-deferred income.

http://www.ccra-adrc.gc.ca/menu-e.html

X. Miscellaneous Questions:

What about DRIP's (Dividend Re-Investment Plans)?

OperaBob set up a site here at the Motley Fool. Cecil Omar also has a helpful little book on Canadian DRIP's.
http://boards.fool.com/Messages.asp?bid=115440

Where can I find short interest on Canadian stocks?
Good luck. The TSE (www.tse.com) publishes the largest 20 short positions every 2 weeks (currently Bombardier and Nortel are leading the pack). The Globe & Mail used to publish the top 200 or so positions every 2 weeks, but I haven't seen this in their paper for well over a year. Carlson's on-line has this info as part of their premiere content, but you'll have to pay for it (www.fin-info.com).

What about insider trading?
With lots of fanfare, a new online site was developed last year for insider trading in Canadian securities. It crashed horribly, and insiders are back to filing their reports by hand. You can pick up major activity in the National Post or the Globe & Mail, or on a premium site like Carlson's Online (www.fin-info.com).

How do I format my messages?
You need to know a little bit of HTML. HTML tags appear inside these symbols <> on both sides of whatever you want to format; inserting / in front of the symbol turns the formatting off. However, if I type them exactly the way they should appear in your message, you won't be able to see them in this message. So I'll include additional quotes “” around the character—but you would exclude these in your message.

<”I”>For italics, use I, but don't forget to turn it off when you're done quoting someone. <”/I”>
<”B>Use B for bold<”/B>
<”pre>The pre toggle allows you to format complex tables (it's like using a courier font).<”/pre”>

For a complete guide on posting refer to the ATHM board

http://boards.fool.com/Registered/message.asp?id=1060256001157000

You can search out the top recommended posts on this board by clicking the word REC. If you like a particular authors posts, you can sort by author's name and see all their posts in sequential order. If you like something someone has written, you can indicate your approval by giving them a “Rec” (i.e., by hitting the “recommend this post” button).

Hey, you could try it right now.

Respectfully submitted,

Todd
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