Canadian Investing Frequently Asked Questions Version 3.0Introduction and General ResourcesWelcome to the Canadian Investing Board!version 1.0 of the FAQ:http://boards.fool.com/Message.asp?id=1050002001364000version 2.0 of the FAQ:http://boards.fool.com/Message.asp?mid=17176740How to format your message:www.fool.com/community/foolboards/bells.htm#StylingTo post in tabular format, use < PRE > and < / PRE > , but without any spaces between the brackets and slash.Please recognize that any information available on these boards is subject to change. 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.TABLE OF CONTENTS1. Introduction and General Resources2. Table of Contents3. What is the Canadian Investing Board?3a. Other Canadian Boards3b. Getting Started4. Canadian Indices5. The Canadian stock Exchanges6. The Canadian Discount Brokerages7. Canadian Mutual Funds8. Mechanical investing Strategies for Canadian investors9. RRSP/RRIF/RESP's10. Taxes11. Income Trusts12. Internet resources for Canadian Investors3. What is the Canadian Investing Board?The Canadian General Board is a community of mostly Canadians and some Americans, but open to anyone who is interested in investing in, or already have a vested interest in various Canadian stocks. The most frequently discussed topics on this board tend to be regarding publicly traded Canadian companies, the Canadian economy, and the occasional political discourse. 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].3a. What other Canadian message boards are there?Glad you asked.Canadian MicroCap board- Intended for discussion of any Canadian companies with MktCap < 200 Million Loonies.http://boards.fool.com/Messages.asp?bid=100181The Great Foolish North - Any persistently OT postings on the Canadian Investing board gets directed to this board:http://boards.fool.com/Messages.asp?bid=113597Bombardier Community - Intended for discussion of Bombardier:http://boards.fool.com/Messages.asp?bid=116402Some Canadian companies that are dual listed on one of the American exchanges have their own boards. Some of the more popular ones include:Fording Coal Trust:http://boards.fool.com/Messages.asp?bid=116925Nortel:http://boards.fool.com/Messages.asp?bid=106306Research In Motion:http://boards.fool.com/Messages.asp?bid=107841Just Don't Sell Us:http://boards.fool.com/Messages.asp?bid=105124Provident Energy Trust:http://boards.fool.com/Messages.asp?bid=117334QLT Phototherapeutics Inc:http://boards.fool.com/Messages.asp?bid=107501The above is not an exhaustive list by any means. There are some additional Canadian boards, such as one for discussing RRSP's, and Canadian mutual funds. However, they have so little traffic that eventually the discussion winds up back in this Canadian Investing board. If you really want to visit those boards, you can search for "RRSP Strategy/Taxation" and "Canadian Mutual Funds"3b. Getting Started What is the best way to use this FAQ? If you are new to Canadian stocks and/or new to this board, the best approach is probably to quickly read the entire FAQ, to familiarize yourself with its contents. Avoid clicking on all of the links right away unless you have the extra days of time. Use this FAQ as a reference that you can return to as needed.When you return to this FAQ to look for a specific answer or message, it is best to use your browser's search capability to search for the desired text. If you cannot find an answer to your question in this FAQ, then post your question to this board. I'm new to Canadian Stocks. Where should I begin? Trying to read this FAQ may seem a bit overwhelming at times if you're a complete newcomer to Canadian stocks. People toss out ticker symbols, companies, with no explanations at all. It will take a little time & effort to "get up to speed", but you can easily do so. Here are some specific suggestions to help get you started.1. Read every message you can, even if you don't understand most of them. Eventually, they will all begin to make sense.2. Decide upon which area of Canadian Investing you wish to focus on. Are you interested in Income Trusts? Oil and Gas Companies? Mining companies? Biotech? High Tech? Financial companies? High Dividend yield companies? All of the above?3. Start reading the Canadian business news and especially those articles which discuss the areas you are interested in. The links at the end of this FAQ provide good sources of Canadian Business news.4. Write some posts. After doing some reading, if there's something you don't understand, ask. There may be dozens of other "lurkers" who also don't understand it, and would like to ask, but don't. Help them, and help yourself.4. Canadian Indices What are the Canadian Indexes?All Canadian stocks traded on the TSX are classified in one of 13 sub-categories:S&P/TSX Capped Consumer Discretionary Index (TTCD) S&P/TSX Capped Consumer Staples Index (TTCS)S&P/TSX Capped Diversified Metals & Mining Index (TTMN) S&P/TSX Capped Energy Index (TTEN)S&P/TSX Capped Financials Index (TTFS) S&P/TSX Capped Gold Index (TTGD)S&P/TSX Capped Health Care Index (TTHC)S&P/TSX Capped Industrials Index (TTIN)S&P/TSX Capped Information Technology Index (TTTKD)S&P/TSX Capped Materials Index (TTMT)S&P/TSX Capped Real Estate Index (TTRE)S&P/TSX Capped Telecommunication Services Index (TTTS)S&P/TSX Capped Utilities Index (TTUT)In addition, the S&P also created a couple of indices unique to the Canadian markets, and that is the S&P/TSX Income Trust Index, and the S&P/TSX Oil and Gas Trust Index. Information on these indices and their constituent companies can be found here:http://tinyurl.com/8vvkj What ever happened to the TSE300 ? Prior to the invasion of the Yanks, the TSX Group used to manage its own indices, and they were the ones described in v1.0 of this FAQ. After the S&P took over, alignment with how the S&P organized their indices became a desirable goal. As a result, the S&P/TSX 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, was replaced by the S&P/TSX Composite Index. The new index adds some criteria, like minimum trading volumes and trading prices ($1), that the old TSE 300 didn't have. Changes to the indices are pre-announced on the TSX web-site. Also, a TSX small Cap, and mid Cap index was created as a Canadian version of the S&P Midcap index (AMEX:MDY) and the S&P smallCap index (AMEX:IJR).I heard that income Trusts were going to be added to the S&P/TSX Composite Index. Is this true?Yes.http://www.robtv.com/articles/rob.tv/193/tsx.html"In September 2005, Standard and Poor's began a six-month transition toward making income trusts a full-fledged component of the S&P/TSX composite index by adding 68 trusts to a new provisional index.The plan is for one-half of the weight of the trusts to be included in the existing S&P/TSX composite index this December. The full weight of the provisional trust index will be reflected in daily measurements in March, when the provisional indexes were to be eliminated. The schedule, as announced in June 2005, and confirmed on October 11, 2005 is:- Income Trusts will be added to the S&P/TSX Composite Index in two steps, after the close on Dec. 16, 2005 and March 17, 2006.- Income Trusts will not be added to the S&P/TSX 60 Index" Can I invest in or trade any of these indices ? Not all of them can be traded. Information on the indices that are available for trading can be found here:http://www.iunits.com/english/funds/fundprofiles/XIU/index.cfmAlternatively, 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. But I still have some more questions about these S&P/TSX indices.Cool. You might find the answers here:http://www2.standardandpoors.com/spf/pdf/index/faq_canada.pdf5. What are the major Canadian stock exchanges?The Toronto Stock Exchange (TSX) is Canada's premiere stock exchange, which handles most of Canada's large capitalization companies (www.tsx.com). However, the TSX 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 (CDNX) resulted from merging the old Vancouver, Alberta, and Winnipeg exchanges. It has since been acquired by the TSX Group and shares the same web-site. The Vancouver Exchange used to be the favourite home of shady, unscrupulous penny stock promoters who would lure, cheat, and defraud the unsuspecting investor out of their hard earned dollars. After the merger to create the CDNX, the image was cleaned up a bit,and they renamed themselves to be called the TSX Venture Exchange. Nowadays, the CDNX is the home to many junior miners, drillers, explorers, techs, and bioTechs, although the occasional shady penny stock dealers still exists. Most of the companies listed on the CDNX are on a path to meet the requirements to graduate to the "Big Board", ie. the TSX.The Montreal Exchange (http://www.boursedemontreal.com/accueil_en.php or www.me.org) handles all options and derivatives trading in Canada. Currently, options are available on about 75 Canadian stocks and another 15 indices or sub-indices.Recently, a new Canadian stock exchange was launched:http://www.cnq.ca/Page.asp?PageID=861&SiteNodeID=162&BL_ExpandID=1393Be 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. What's with the .NV, .SV, .MV, .RV suffixes that appear after some of the ticker symbols? These suffixes were the manifestations of an attempt by the TSX Group to bring some transparency to the share voting structure of the public companies behind the ticker symbols. The response to these new suffixes was a thumbs down from all parties - the fund managers, institutions, and retail investors all disliked having to deal with these extra letters appended to the ticker symbol. Cosequently, the TSX Group recently announced that they will be removing these suffixes:http://www.tsx.com/en/mediaNews/newsreleases/12-21-2005_TSX-StockSymbols.html6. What are the major Canadian online discount brokerages?In addition to the brokerages available at the Big5 banks (TD Waterhouse, BMO Investorline, RBC ActionDirect, ScotiaMcLeod, CIBC Investors Edge), other online discount brokerages include:Credential Direct www.credentialdirect.comE*Trade Canada www.canada.etrade.comQuestrade www.questrade.comDisNat Direct: www.disnatdirect.com/National Bank Direct Broker: http://tinyurl.com/dfhyvHSBC InvestDirect www.investdirect.hsbc.ca/eNorthern www.enorthern.com/default.pageTradeFreedom www.TradeFreedom.comInteractive Brokers: www.interactivebrokers.caAmeriTrade Canada: www.ameritrade.caNote that Ameritrade currently provides the ability to trade only stocks listed on the US Exchanges (AMEX, NYSE, and Nasdaq). However that will change once Ameritrade's acquisition of TD Waterhouse (US) is complete (est. 06Q1). At that point, Ameritrade Canada will be folded into TD Waterhouse Canada's operations.http://phx.corporate-ir.net/phoenix.zhtml?c=92139&p=irol-newsArticle&ID=723015Additional info on Questrade:http://boards.fool.com/Message.asp?mid=20192312Additional info on InteractiveBrokers (IB):http://boards.fool.com/Message.asp?mid=23010398http://boards.fool.com/Message.asp?mid=21404931Discussion on how IB handles US and Canadian currencies:http://boards.fool.com/Message.asp?mid=23177726&sort=whole#23205243Inquiry about QuesTrade that evolved into a plug for IB:http://boards.fool.com/Message.asp?mid=22791690&sort=wholeSahfee, a regular poster on this board, carried out a commission comparison between a couple of brokers:http://boards.fool.com/Message.asp?mid=20349375After that post, IB changed their commission structure. The new comparison which reflects IB's updated commission structure can be found here:http://boards.fool.com/Message.asp?mid=23488419Note that the cap on the max. commission is 0.5% of the total trade, and not the 0.05% mentioned in that post.Why are there so many posts about Interactive Brokers? The reasons are two fold:a) Those who are using the other discount brokerages have not posted their experiences to this board.b) Interactive Brokers is held in high esteem by some members of this board. Those members also happen to be the ones who post regularly on this board. Put 2 and 2 together, and you get an above average amount of favourable PR for Interactive Brokers.c) The difference in commissions is staggering in some cases like for penny stocks under $2. So which one is the best discount brokerage? The answer is that it depends on what you are looking for. If you are looking for an account for active trading you may want to further investigate Interactive Brokers, since they have the lowest commissions, and the $10 monthly minimum would be waived if you are actively using the trading acct. If you are looking for a one-stop shop for banking, RRSP, and investments, then a brokerage account with one the of the big5 banks is worth considering. If cost is more important than ease of use, then you may want to consider one of the above listed discount brokers (ie. anything but one of the big5). If you do care whether you have your RRSP and trading accounts with the same broker, then Questrade may be worth investigating. Gomez Canada issues an annual scorecard of many of the major brokerages: https://www.watchfire.com/scorecards/viewscorecard.aspxGomez scores the brokerages according to various categories, some of which have been described in the above.GlobeInvestor conducts an annual survey of the Canadian brokerages as well, but unfortunately, the results of those surveys are no longer available for free.http://gold.globeinvestor.com/servlet/GIGoldFile/static/brokersurvey/index?back_url=yesNorm Rothery also provides information on Canadian brokers at his site:http://www.ndir.com/SI/brokers/discount.shtml#557. 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.analyserFor 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).8. What are some Mechanical investing Strategies for Canada?Interest in the Canadian version of RP4, the Foolish 4, aka Beat the TSE, and other mechanical screens for Canadian stocks have drastically diminished over the years. The most recent discussion about mechanical investing screens for Canadian stocks can be found here:http://boards.fool.com/Message.asp?mid=23134875&sort=wholehttp://boards.fool.com/Message.asp?mid=23366095&sort=wholeYour best bet is to post your questions and wait a few days to see whether the one or two regulars on this board interested in mechanical investing will respond. What ever happened to the Beating the TSE board? It was transformed into the Canadian MicroCap board.I suppose your next question is why?Because discussion about beating the TSE and other mechanical strategies dried up like a drop of water in a hot skillet. Rather than euthanize the board, some regulars from this board decided to rename it and make it the new home for discussions about Canadian MicroCaps.9. Registered Investment AccountsRRSP (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. However, there is one major shortcoming: 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 in non-RRSP accounts. There also used to be a restriction on the percentage amount of foreign content that could be held inside an RRSP, but as of 2006, that restriction has been removed.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 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. Are RRSP's really the best thing since sliced bread? Am I better off contributing to my RRSP, or contributing to my non-registered investment account? Which is better, RRSP, or non-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 in the previous question 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”.Every mutual fund salesman and the Canadian Federal government would like you to believe that RRSP's are better. But there are subtle drawbacks with the RRSP, and it involves the tax treatment of RRSP's as described above. It is discussed in further detail in these two posts.http://boards.fool.com/Message.asp?mid=23294131http://boards.fool.com/Message.asp?mid=23294260RRIF (Registered Retirement Income Fund)Investments held inside an RRIF grow in a tax-deferred manner just as investments in an RRSP do. When money is withdrawn from an RRIF it is taxed as regular income. Money that remains inside the RRIF grows tax-free. The minimum RRIF withdrawal each year is determined by a percentage, depending on the holder's age, of the total value of the plan on January 1 each year. The holder of a RRIF can elect to withdraw an amount greater than the minimum at any time. One can only withdraw from an RRIF and cannot contribute to the plan. By the end of the calendar year in which you turn 69, you have to convert your RRSP to an RRIF. https://www.tdcanadatrust.com/rifsandrios/faq_rif.jspRESP (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.10. TaxesInside 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. The top marginal rate is now just under 50% and varies with each province. The top rates range from 39% (Alberta) to 48.6% (Nfld). The median top rate is 46.4%. As an example, if you're in a high tax bracket in a high tax province (eg. Newfoundland ), you'll pay close to 50% tax on interest income, 37% on dividend income, and 25% on capital gains. Note that recently, the Canadian Federal Government announced new changes to the dividend tax credit. In previous years, the dividend tax credit was calculated by multiplying dividends by 25% (called a gross-up), and then apply a 13.33% tax credit. The new rules are a 45% gross up and then apply a 19% tax credit. Discussion of the new dividend tax credit can be found here:http://boards.fool.com/Message.asp?mid=23411801&sort=wholehttp://boards.fool.com/Message.asp?mid=23524647In general, capital gains still receive the most favourable tax treatment, since only 50% of capital gains in an asset needs to be reported as investment income. So in general, $100 in capital gains is worth more after taxes than $100 in dividends, and $100 in dividends is worth more after taxes than $100 in interest income, 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. What are some tax issues that Foreign investors should be aware of when investing in publicly traded Canadian companies?http://boards.fool.com/Message.asp?mid=23318669&sort=whole#23318738What are some online resources for answering my tax questions?http://www.cra-arc.gc.ca/menu-e.htmlhttp://www.netfile.gc.ca/http://www.moneysense.ca/planning/taxes/index.jspThere is also a forum on that moneySense website where you could find answers to your tax related questions.I've heard some discussion about the Smith Manoeuvre. What is that? It's a tax and investment strategy that relies on a specific allowance in the Canada Income Tax act. In a nutshell, the interest charged and paid on any sum of money borrowed for the purpose of investing in income generating capital assets is eligible for a tax deduction. You can get more details from the horse's mouth here:http://smithman.net/home.htmlWhat software is available to assist in preparing Canadian income tax returns? Canadian Tax software comes in two flavours:windows/Mac software program:http://www.quicktax.cahttp://www.genuTax.cahttp://www.TaxTron.cahttp://www.mytaxexpress.com/http://www.taxwiz.ca/http://www.TaxCel.cahttp://www.UFile.caThere are also web applications that assist in preparing your income tax returns. These web applications are cheaper than the Windows tax software, but they store your tax information (securely) on the web:http://www.SnapTax.cahttp://www.QuickTaxWeb.cahttp://www.T1Filer.cahttp://www.CuteTax.cahttp://www.WebfTax4U.caLooking for freebie? Too cheap to shell out the 40 Loonies for QuickTax, but don't want to admit it? Well, lucky for you, someone from Victoria, BC decided to provide a free tax filing software program out of the goodness of his own heart.http://pacificcoast.net/~gthompson/The only downside to this free tax software is that it does not have the ability to NetFile. Apparently, it costs money to become certified for NetFile.11. INCOME TRUSTSWhat is an income Trust?An income Trust is an investment entity that owns an operating entity which in turn, owns some form of income producing assets, and it issues shares, or "trust units" which represent right to participate in any income derived from the assets. The trust units are traded on the TSX just like any other stock/warrants/debentures. In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity's income for tax purposes. These deductions can reduce the operating entity's tax to nil. The trust in turn, "flows" all of its income received from the operating entity out to unitholders. The distributions paid or payable to unitholders reduces a trust's taxable income, so the net result is that a trust would also pay little to no income tax. The net effect is that the interest, royalty or lease payments are taxed at the unitholder level. There are three main categories of income Trusts:Real estate investment trusts (REIT's) - REITs generally acquire income-producing real property and earn income leasing the property to an operating entity, or earn primarily interest income through the holding of mortgage backed securities. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.Oil & Gas Royalty/Energy trusts - Royalty trusts, "resource trusts" or "energy trusts" exploit natural resources such as oil and natural gas. Oil and Gas Trusts earn royalty income from resource properties through a royalty interest, or earn primarily interest income through the holding of equity and debt of an operating entity. The amount of distributions paid will vary from time to time based on production levels, commodity prices, royalty rates, costs and expenses, and deductions.Business trusts - Business income trusts are individual companies that have converted some or all of their stock equity into an income trust capital structure for tax reasons. Business income trusts are used in many sectors, such as manufacturing, food distribution, and power generation and distribution. They are not investment trusts in the classic sense, since they represent a single company's assets and not a pool of investments.Why are Trusts attractive to Investors?The benefits of an Income Trust are two-fold:a) The periodic cash distribution of income Trusts greatly exceed typical dividend rates for dividend paying equities. Before they were "discovered" by the general investing populace, many income trusts were distributing cash equivalen to a 15% yield or more to its unitholders.b) The income Trust itself is structured to pay little to no coporate taxes.c) The cash distributions made by an income trust to the unit holder is treated as income, and not capital gains, and therefore, are taxed at the marginal rate of the individual unit holder. However, the unitholder has flexibility on how and when the tax will be applied. For example, if the unitholder holds the units of the income trust withing an RRSP, then no taxes will charged until the unitholder withdraws cash out of the the RRSP.Furthermore, some income trusts distribute a portion of the cash as a Return of Capital, so that taxes on it are deferred until the unit is sold. The deferral reduces the unit holder's adjusted cost base and the amount of capital gains he or she pays when selling the units in a traditional (non-RRSP) investment account.So if Trusts are so attractive, then are there any risks ?Oh yeah, there are risks associated with investing in an income trust:a) Since they are bought and sold like any other stock, they will experience the same kind of volatility that a typical equity goes through in trading on the exchange.b) Most income trusts typically focus on one area, like being an O&G producer, or buying up real estate and leasing them out to tenants. Most, if not all of their revenues, will be derived from this one specific area, so there are no diversified sources of revenue.c) Many, but certainly not all income trusts do not set aside a portion of their free cash flow to re-invest into the business like buying new equipment, paying for new projects, R&D, etc. In other words, the traditional income trust does not spend on CapEx, and therefore will be sacrificing growth for stability of cash distributions.However, it should be noted, that there is a new breed of income trust that is both growing their business and growing their cash distributions. Furthermore, many O&G Trusts have started a new and recent trend of separating and spinning off the growth portion of their business into a new company. The traditional stigma that the business behind an income Trust will not grow is being changed and transformed.Are Income Trusts a fad? Not likely, as they have been recently added to the S&P/TSX Composite Index. What is currently the highest yielding trust out there? http://tinyurl.com/99b3eNote that this is NOT even remotely similar to asking what is the best income trust out there.Ok, so then what is the best Income Trust out there?The traditional metric of using P/E to evaluate a company does not really apply to income trusts, since net income for an income trust does not carry the same significance as net income for a public company. Furthermore, there is no standardized method for income trusts to calculate distributable cash flow, leaving it up to the income trust to derive its own definition. This alone makes it hard to compare two trusts in an apples to apples comparison. This is probably not the answer you were hoping to hear, but there are no standardized methods for singling out the best Income Trust. From time to time, members of this board post about some trusts that they like, so the best approach is to read their posts about it. Or better yet, when they post about that trust, ask them more about it - why do they like it so much, how did they find it, would they still buy it, etc....Where can I find out more about Income trusts?http://www.trustinvestor.com/index.phphttp://en.wikipedia.org/wiki/Income_trusthttp://www.investcom.com/incometrust/incometrust.htm12. Any recommended Internet Resources for Canadian Investors?Canadian companies are generally very poorly followed by the US media. So, if you're looking to do some research on some Canadian publicly traded companies, try the following websites:Canadian Finance portals:http://www.investcom.com/Investcom seems to be an aggregator of data (albeit a decent one) from Yahoo!Finance, StockWatch, Lycos, and StockHouse websites. They also seem to have some interesting unique content regarding income trusts and miners.http://www.stockhouse.cahttp://www.stockWatch.comBoth of the above websites have good general info and quotes on Canadian stockshttp://www.globeinvestor.comGlobeInvestor seems to be popular amongst many regular users on this board. It is a good, reliable source of news, and basic fiancial info about a Canadian company. Its main weakness is that it is lacking some user friendly features in its portfolio tracking products.http://ca.finance.yahoo.comYahoo!Finance Canada is good for aggregating newsfeeds for a "portfolio" of stocks. However, its information on dividend yields, MktCap, and other basic info about Canadian companies is inaccurate at best.Canadian business newsfeeds:http://www.newswire.cahttp://www.newswire.ca/earnings/Annual Reports and Official Documents (Canadian "SEC"): http://www.sedar.com/issuers/issuers_en.htmInsider Reports for Canadian companies:http://www.sedi.caBusiness News: http://www.canada.com/nationalpost/financialpost/index.htmlhttp://www.fin-info.com/http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Render&cid=968350072197http://www.ft.comhttp://www.cbc.ca/business/http://www.ctv.ca/businessRobTV (www.robtv.com) is Canada's only all business specialty channel. They are owned by Bell GlobeMedia (a division of BCE), the same corporation that owns CTV and the Globe and Mail. They regularly bring in fund managers and CEO's for interview. They have an comprehensive archive of recommended picks from the fund managers.http://www.robtv.com/static/guest_picks.tvRobTV also maintains a one-week archive of their daily broadcasting.http://www.robtv.com/shows/past_archive.tvCharting:BigCharts: http://bigcharts.marketwatch.com(insert “ca:” in front of Canadian tickers)Bigcharts is useful for comparing the performance of various stocks.StockCharts:http://www.stockcharts.comStockCharts is the definitive site for conducting Technical analysis of various stocks trading on the US and Canadian exchanges.Others: http://www.canadianmoneysaver.ca/index.htmhttp://www.ticonline.com/http://www.ndir.com/http://www.moneysense.ca/Canadian Personal Finance Software:http://www.quicken.ca/Info on BC's hi-tech and BioTech industry (public + private companies)http://www.bctechnology.comhttp://www.leadingedgebc.ca/http://www.bcbiotech.caInfo on the hi-tech and BioTech industry (public + private companies) in the Waterloo region:http://www.communitech.ca/http://www.techtriangle.comInfo on the Ottawa Hi-Tech industry:http://www.ottawabusinessjournal.com/Info on Bank of Canada's key interest rates:http://www.bankofcanada.ca/en/monetary/target.htmlAnd last but not least, portions of this FAQ has been brought to you by contributions from the following people :sahfee, mukluk
Credential Direct www.credentialdirect.comE*Trade Canada www.canada.etrade.comQuestrade www.questrade.comDisNat Direct: www.disnatdirect.com/National Bank Direct Broker: http://tinyurl.com/dfhyvHSBC InvestDirect www.investdirect.hsbc.ca/eNorthern www.enorthern.com/default.pageTradeFreedom www.TradeFreedom.comInteractive Brokers: www.interactivebrokers.caAmeriTrade Canada: www.ameritrade.ca
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