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MAY 2022
SPECIAL FEATURES The ABCs Of ESG Investing Part 1: What ESG Investing Means
Richard Morrison 6
How Business Owners Can Preserve The Small Business Corporate Income Tax Rate My Biggest Investment Losses And Lessons Learned
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How Are Assets Taxed On Death?
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Live Long And Prosper Why We Need To Rethink Retirement Spending Now Seeking Refunds With Online Retailers Bitcoin And The First-Mover Massacre 40 Lessons Learned After Almost 40 Years
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CONTRIBUTING EDITORS: Ed Arbuckle, Isabelle Beaudoin, Dan Bortolotti, John De Goey, Donald Dony, David Ensor, Derek Foster, Benj Gallander, Janet Gray, Robert Keats, Kelley Keehn, Ken Kivenko, Marie-Josée Loiselle, Moez Mahrez, Ryan Modesto, Richard Morrison, Caroline Nalbantoglu, Brian Quinlan, Wynn Quon, Rino Racanelli, Barkha Rani, Colin Ritchie, Scott Ronalds, Norm Rothery, Rita Silvan, Allan Small, Barbara Stewart, Kornel Szrejber, Brian Tang, Becky Wong. MEMBERSHIP RATES: All rates for Canadian residents are printed on the inside back cover. Non-residents of Canada may purchase the online edition only – at $19.99 for one year’s service. ADVERTISING: Canadian MoneySaver does not endorse or recommend any commercial products, processes, or services other than those specifically copyrighted and marketed by Canadian MoneySaver. The advertising of products and services in Canadian MoneySaver does not imply an endorsement of any kind. All brands advertised are the trademarks of their respective owners. For advertising inquiries please contact Nancy Laviolette advertising@canadianmoneysaver.ca Canadian MoneySaver (CMS) is published by The Canadian Money Saver Inc., 470 Weber St North, Suite #104, Waterloo, ON N2L 6J2 Office hours: 9:30 am to 1:30 pm EST Website: http://www.canadianmoneysaver.ca E-mail: moneyinfo@canadianmoneysaver.ca Canadian MoneySaver publishes monthly with three double issues (July/Aug, Nov/Dec and March/April). Canadian MoneySaver is an independent magazine. The information contained in Canadian MoneySaver is obtained from sources believed to be reliable. However, we cannot represent that it is accurate or complete. The views expressed are those of the writers and not necessarily those of The Canadian Money Saver Inc. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any securities or commodities. Canadian MoneySaver is distributed with the explicit understanding that Canadian MoneySaver, its publisher or writers cannot be held responsible for errors or omissions. Shareholders of The Canadian Money Saver Inc, editors and contributors may at times have positions in mentioned investments/securities. Copyright © 2022. All rights reserved. No reproduction, transmission or publication of any of the contents of Canadian MoneySaver is permitted without the express prior consent of the copyright owner. To obtain permission to use any part of Canadian MoneySaver, contact Lana Sanichar. ® – Canadian MoneySaver is a Registered Canadian Trade Mark of The Canadian Money Saver Inc. Printed in Canada ISSN: 0713-3286
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MAY 2022 Volume 41, Number 7
Sharing With You
W
ell, between Covid outbreaks and new variants, higher interest rates, higher inflation and other issues, 2022 did not start out well. Now, to make things worse, we have a horrible war to deal with. Our thoughts go out to all those impacted by this completely unnecessary aggression. But we will have to leave the political debate to others; we have to focus on the impacts to North America. First, inflation may rise much more than expected. Russian supplies of just about everything have been curtailed. Ukraine supplies are also of course impacted. The best approach is to assume everything is about to rise in price, except perhaps your stocks for a while. We would encourage investors to have some materials and energy exposure and gold in your portfolios. Amounts need to be personal, but some ‘insurance’ against inflation is likely a good thing right now. Two, interest rates are going higher. This should cool the housing market a bit, and finally give ‘savers’ a break from 0.75% GIC rates. We don’t know how high rates will go, and the magnitude of any change will largely depend on inflation rates. Right now, governments are worried, and rates could also go higher than expected. The fall out of all this? Well, we are going to see a lot of ‘recession’ talk. When rates rise and costs go up, demand falters. An economic contraction could be relatively quick, as well, as uncertainty is the only certainty these days. But don’t panic. There have been 48 recessions in the last 100 years. They are part of the cycle. They are of course not good for workers who could be laid off, or over-leveraged real estate investors. But, for diversified investors, they are not so bad. Recessions get a lot of press, but if you own quality companies and have a diversified portfolio, you’ll survive.
Peter Peter Hodson, CFA
4 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022
MoneySaver DIVIDEND& COMPANY NEWS In this column we list recent news, events, dividend income news and any other relevant information for MoneySavers. News items are those received after our last publication date. Please go to https://www.5iresearch.ca/dividend-updates for a more comprehensive list of dividend updates. ■ TransAlta (TA) raises dividend by 11%.
■ Primo Water (PRMW) raises dividend by 17%.
■ Gibson Energy (GEI) raises dividend by 6%.
■ Quebecor (QBR.B) boosts dividend by 9%.
■ Maple Leaf Foods (MFI) raises dividend by 11%.
■ Gildan Activewear (GIL) raises dividend by 9%.
■ Stantec Inc. (STN) raises dividend by 9.1%.
■ Dundee Precious Metals (DPM) raises dividend by 33%.
Canadian MoneySaver MODEL ETF PORTFOLIO SYMBOL
CATEGORY
PRICE
# OF UNITS
iShares 1-5 Year Laddered Corporate Bond
CBO
Fixed Income
17.65
506
8,930.90
4.6%
iShares DEX Universe Bond
XBB
Fixed Income
29.27
280
8,195.60
4.2%
iShares S&P/TSX Canadian Preferreds
CPD
Fixed Income
13.37
738
9,867.06
5.1%
iShares S&P/TSX Capped Composite
XIC
Equity: Canada
34.93
740
25,848.20
13.3%
iShares S&P/TSX Cdn. Div Aristocrats
CDZ
Equity: Canada Div.
33.60
613
20,596.80
10.6%
iShares U.S. High Yield Bond Index ETF
XHY
Fixed Income
17.59
350
6,156.50
3.2%
Vanguard FTSE Emerging Markets Index
VEE
Equity: Emerging
35.36
285
10,077.60
5.2%
Vanguard FTSE Developed Europe All Cap
VE
Equity: Interntional
30.62
304
9,308.48
4.8%
SPDR S&P 500
SPY
Equity: U.S.
452.92
41
23,245.58
12.0%
Vanguard US Dividend Appreciation Index
VGG
Equity: U.S. Div.
69.35
217
15,048.95
7.8%
ETF
TOTAL
% OF PORTFOLIO
iShares Russell 2000 Growth
IWO
Equity: U.S. Growth
258.82
45
14,579.59
7.5%
BMO Covered Call Utilities
ZWU
Equity: N.A. Div
13.54
604
8,178.16
4.2%
Vanguard Information Technology Index
VGT
Equity: U.S
415.26
27
14,035.21
7.2%
Consumer Discretionary Select Sector SPDR
XLY
Equity: U.S
185.23
60
13,912.25
7.2%
Cash
Cash
Cash
5,918.71
3.1%
Total Portfolio Exchange Rate Inception value: Inception date:
193,899.59 1.25
$ Gain/(Loss):
93,899.59
100,000.00
% Gain/(Loss):
93.90%
October 18, 2013
% Annualized:
8.14%
Prices are at market close on April 1, 2022. Individual prices are in USD$. Portfolio values, $Gain/(Loss), % Gain/(Loss), % Annualized all reflect USD$ values are converted to CAD$ Returns include foreign exchange gains/losses Current notes: Added a 4.0% position of SPY and a 2.0% position of VGT, trimmed a 4.0% position of XIC, and switched VIG with VGG as of Dec 03, 2021 market close. Other notes: Keep in mind all investors are different. This portfolio is designed as a guide in setting up your own personal portfolio. Unique considerations and adjustments need to be made to reflect your personal situation. Please perform your own due diligence before making investment decisions. For use by Canadian MoneySaver subscribers only. Not for redistribution. Analysts do not own a financial or other interest in any of the above securities. Past performance is not an indicator of future performance. Not for redistribution. Please direct portfolio questions to moneyinfo@canadianmoneysaver.ca.
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022 z 5
Sector Focus
The ABCs Of ESG Investing Part 1: What ESG Investing Means Richard Morrison
A
new generation of socially conscious Corporations perceived as having an indifferent investors is spreading its influence over the attitude toward ESG risk alienating investors. Even if corporate world. Today’s investors are often they don’t own any shares directly, investors who care millennials (typically those born between about ESG may own units in mutual funds and exchangetraded funds or may be members of pension plans or 1981 and 1996) who have grown up on a planet that is own policies with insurance companies, all of which are obviously getting warmer. They don’t want investment major institutional investors. These returns that come at the expense funds have a huge influence over of the environment, nor results achieved without the guidance of A company that ignores corporate decisions and may own so many shares of a corporation that people who have been historically they have seats on the company’s u n d e r re p re s e n t e d a t s e n i o r ESG or pays it only lip board. management levels. Millennials won’t invest until they know a service risks annoying an As always, institutional investors corporation’s environmental, social must represent the interests of their and corporate governance (ESG) institutional investor who unitholders and plan members, and practices are fair and reasonable. today, that means the institutions must follow ESG. Many have clear may turn activist... Briefly, the E in ESG stands policies that forbid them from for environmental issues such as owning shares in companies that pollution, climate change, greenhouse gas emissions and have poor ESG records. A corporation seen as a major the depletion or preservation of natural resources, while generator of greenhouse gas or one with a history of toxic the S represents a company’s social attitudes—how it spills, for example, would have no chance of appearing treats its employees, its customers, and its neighbours. on these institutions’ lists of acceptable investments. Finally, the G for governance looks at issues such as Similarly, these funds may refuse to hold shares in boardroom diversity, executive compensation, conflicts businesses that turn out products such as tobacco, alcohol of interest and shareholder rights. ESG is a broad or weapons, or companies that have a dual-class share umbrella term that includes an assortment of attitudes structure, where major decisions are restricted to an inner and policies that may help or harm a corporation’s circle of voting shareholders. financial performance. Within ESG is a subgroup called A company that ignores ESG or pays it only lip socially responsible investing (SRI), in which investors service risks annoying an institutional investor who apply their own values to decide whether to invest. For may turn activist, casting votes against current board example, a socially responsible investor may refuse to members and nominating replacements. Alternatively, invest in companies that make guns, missiles, cigarettes the institution may simply sell its shares and walk away, and so on. Finally, a subset of SRI is impact investing, perhaps reinvesting its millions in a competitor. Either which involves directing money to businesses, non-profit way, ignoring ESG is terrible for business. organizations and charities that are visibly and actively working to improve the world. With so much at stake, corporations that once focused 6 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022
exclusively on profits now split their time between finding new ways to enrich their shareholders and new ways to make the world a better place. Along with the traditional tables of revenue and earnings, most of today’s financial statements include details on a corporation’s ESG practices. Corporations can reap huge benefits if they can show—or even just convince—investors that they are devotees of ESG principles. Not every corporation is honest. The term “greenwashing” describes the fraudulent practice of trying to trick consumers and investors into believing that the products or services your company turns out are environmentally friendly. Corporations in the energy sector are frequently cited by environmentalists for greenwashing. Just as corporations try to convince investors of their commitment to ESG, mutual funds, ETFs, pension funds and insurance companies generate mountains of material to reassure their unitholders and plan members that they will only invest in the good guys. As with most corporate ESG literature, the typical institutional investor’s ESG pages are full of vague statements and flowery language. Many say they will invest in concert with guidelines from ESG-focused groups at the United Nations. Among such groups are the UN’s Principles for Responsible Investment (unpri.org), the UN Environmental Programme Finance Initiative (unepfi.org) and the Global Compact (unglobalcompact.org). These UN groups are, not surprisingly, laden with similarly lofty-sounding vague terminology. When the jargon is removed, the simple message is that institutional investors say they will try to invest members’ money in corporations with good ESG policies, particularly “green” companies, and won’t invest in companies or countries that have poor records on ESG. Should a company or country turn out to be less ESGconscious than originally believed, many institutional investors say their representatives will work with them to improve their ESG performance. Investors’ new interest in ESG has spawned a wave of sites that collect data on corporations’ ESG performance, analyze the results and rank the corporations. This is expensive information to acquire and as a result most of these sites carry hefty subscription fees that only institutional investors and asset managers can afford. Many only accept inquiries from those with corporate email addresses—a clue they don’t want individual investors as clients. One of the few exceptions is Morningstar’s Sustainalytics unit, which offers free access to its ESG risk ratings page (sustainalytics.com/esg-ratings) that ranks more than 9,000 companies. Sustainalytics’ ESG risk ratings range from negligible (a score of 0 to 10), through low, medium,
high and severe (40+). The data can be filtered by industry and risk rating group. By providing Sustainalytics with their contact information, users can access more detailed reports, a company spokesperson said. Another source of ESG ratings is Toronto based Corporate Knights, a Canadian quarterly magazine that sells for $22 a year and appears as an insert in The Globe & Mail. The publication features rankings such as the Best 50 Corporate Citizens in Canada and the Global 100 Most Sustainable Corporations. In the United States, Berkeley, California based As You Sow (asyousow.org), has been advocating for ESG on behalf of shareholders since 1992. This year’s edition of its free Clean200 list of environmentally conscious companies, created in conjunction with Corporate Knights, is made up of 200 giant corporations culled from a pool of 8,480 global firms. The corporations on the list adhere to the goal of net zero carbon emissions, which means the same amount of global carbon is removed from the atmosphere as is added. The group excludes all oil and gas companies, utilities that generate less than 50% of their power from green sources and the top 100 coal companies measured by reserves. The list features companies from 35 countries, with 52 U.S. names and 18 Canadian ones. The 200 companies also meet As You Sow’s social and governance ratings. Along with its list of 200 giant corporations that conform to ESG principles, As You Sow has a library of downloadable reports that feature pointed and sometimes embarrassing revelations about specific industries and corporations. For example, for the last eight years the group has published The 100 Most Overpaid CEOs, a sortable table likely to make chief executives squirm in their gilded seats. Other reports expose companies with poor records in areas such as plastic pollution, pesticides, tobacco and conflicts of interest. Resource companies almost never appear on lists of environmentally conscious corporations working toward net zero emissions This is obviously a problem for Canada. One pro-resource group, Canada Action (canadaaction. ca), takes aim at what it feels are the shortcomings of the ESG process. Founded in 2010, Canada Action describes itself as a non-partisan, grassroots organization that advocates for the responsible development of Canadian resource industries, including oil and gas, mining, forestry and renewable resources. The Canada Action site lists six areas where it feels ESG needs to improve, three of which deal with subjectivity in the ESG ranking process. Ratings agencies don’t yet
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022 z 7
have standardized rules for measuring environmental and social risks, nor do they have effective methods of verifying data that companies provide. The result is that one company may have a good ESG rating from one agency and a poor rating from another, the group says. Companies without a policy for given ESG criteria may receive a score of zero, the group says, citing the example of some Canadian energy companies operating solely in Alberta and Saskatchewan that were given scores of 0 for their “offshore” safety policies, among others, resulting in what it says was lower (and misleading) scores.
2000 and 2017, with a further 16% to 23% reduction expected by 2030, Canada Action’s site says. Mining and forestry companies have also worked to reduce their greenhouse gas emissions by using renewable electricity dramatically, it adds.
Canadian oil sands companies reduced their greenhouse gas (GHG) emission intensity per barrel by 28% between
Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca
Next issue: The second part of this two-part series on ESG investing will examine mutual funds and exchangetraded funds focused on ESG investing and provide a sampling of some publicly traded companies with high ESG ratings.
“This is a much needed resource to help people grow their financial literacy” MoneySaver Podcast Listener IN THIS EPISODE: Erica Alini
Tune in with us today! All episodes are free to download and stream. Hear them all at the link below!
Ellen Roseman speaks with Erica Alini, author of the bestselling personal finance book for millennials, Money Like You Mean It. They talk about what personal finance means to millennials and the challenges that they and Gen Z face. Erica Alini covers personal finance for Report on Business. Previously, she worked for nearly five years at Global News, where she created and wrote Money123, a popular weekly newsletter on money matters.
https://www.canadianmoneysaver.ca/TheMoneySaverPodcast 8 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022
Insurance Products
How Business Owners Can Preserve The Small Business Corporate Income Tax Rate Rino Racanelli
I
f you’re the owner of a Canadian controlled private corporation (CCPC) that earns a significant amount of investment or “passive” income held inside your corporation, you may be losing out on the full benefit of the small business corporate income tax rate. Currently, for CCPCs resident in British Columbia, the small business tax rate on the corporation’s first $500,000 annual active business income is 11%. The tax rate applied to active business income in excess of $500,000 is taxed at the general business tax rate of 27%. Tax rules were introduced in 2019 to penalize business owners that hold passive investments in their
amount of active business income eligible for the small business corporate income tax rate is reduced by five dollars for every one dollar of passive income above the $50,000 threshold. For the purposes of calculating passive income, each one dollar of investment dividends and interest received counts as one dollar towards the $50,000 threshold while each one dollar of realized capital gains count as $.50 for now, although there are concerns that this may increase in the future. Ultimately, if a corporation earns more than $150,00 in passive income in one year, none of its active business income will be eligible for the 11% small business rate the next year.
Passive Investment Income
Active Business Income
Active Business Income Subject to Smaller Rate 11.0%
Active Business Income Subject to General Rate 27.0%
$50,000
$500,000
$500,000
$0
$100,000
$500,000
$250,000
$250,000
$100,000
$325,000
$250,000
$75,000
$150,000
$500,000
$0
$500,000
corporation in addition to the corporation carrying on an active business. Generally, the government didn’t like corporations building up passive investments with funds that had been generated, in part, from the corporate income tax savings provided by the lower small business corporate income tax rate. The 2019 tax changes also included provisions to restrict income sprinkling (a way corporations distribute income, usually by dividends, to lower-income-earning family members). This caused many business owners to keep their profits inside their corporations instead of paying out dividends. Retaining corporate profits means higher passive income. Thus, with the tax changes, if a corporation is earning more than $50,000 in passive income in a year, the
The above chart shows if a corporation has $50,000 or less of passive income, it will not be impacted in making use of the small business tax rate. If the corporation has $100,000 of passive income, its small business limit will be reduced to $250,000 ($500,000 – (excess $50,000 x 5). If the corporation has $200,000 of active business income, there will be no impact, and the full $200,000 will be taxed at the small business corporate income tax rate. However, if the corporation has $325,000 of active business income, it will only benefit from the small business corporate income tax rate on the first $250,000 of its active business income. The remaining $75,000 ($325,000 - $250,000) will be taxed at the higher corporate income tax rate (According to Feb 2018
Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022 z 9
document released by Manulife tax and estate planning services).
A Tax-Exempt Permanent Insurance Plan Does Not Produce Passive Investment Income The key for business owners is trying to keep their corporate income tax rate at the lower 11% instead of, the higher general rate of 27%. How can this be accomplished? One way is to transfer the passive income being earned annually by the corporation to a tax-exempt corporate-owned permanent insurance plan. This type of insurance plan does not produce passive income and may preserve access to the small business corporate income tax rate. Since the corporation is the owner and beneficiary of the plan, everything stays inside the corporation. It’s a simple strategy of re-allocating taxable corporate investments dollars to a tax-exempt insurance plan. The benefit here is that all of the insurance policy cash values (the investment component of the insurance plan) grow tax-sheltered; there is no income tax to pay as long as the money is left to grow inside the plan. None of the growth or income generated inside the policy counts towards the $50,000 threshold discussed above. Year
AGE
Insurance Premium
His income and investment earnings range from $500,000 to $625,000 per year, which includes investment income held in his medical professional corporation (MPC). His corporation is generating a significant amount of excess cashflow each year, and he retains a considerable portion of business profits within his corporation. Over the years, he has been able to accumulate over two million dollars in savings in his corporate account, currently invested in traditional investments including Guaranteed Investment Certificates (GICs), bonds, dividend-paying stocks, preferred and common shares. Every year his MPC pays the applicable tax on income generated from these passive investments (interest and foreign dividends are taxed at 50.67%, capital gains at 25.34% and dividends at 38.33%). Although a substantial portion of this tax is ultimately refundable to his company if he pays out dividends to himself (or his spouse if possible), the extra personal taxes that Dr. Jones might have to pay make this option unappealing. As a result, he figures he will never use up all his corporate cash during his lifetime and decides to purchase an insurance plan from his corporation with an annual investment of $250,000 for ten years.
Cash Value
Death Benefit
CDA
Net to Estate
1
46
$250,000
$175,876
$3,832,147
$3,584,408
$3,707,099
2
47
$250,000
$365,475
$3,886,938
$3,392,231
$3,645,075
3
48
$250,000
$569,473
$3,957,669
$3,216,617
$3,595,368
4
49
$250,000
$791,103
$4,041,354
$3,054,613
$3,558,935
5
50
$250,000
$1,026,491
$4,135,931
$2,904,153
$3,533,715
6
51
$250,000
$1,275,419
$4,240,324
$2,764,217
$3,518,655
7
52
$250,000
$1,537,993
$4,353,517
$2,633,872
$3,512,782
8
53
$250,000
$1,814,514
$4,474,812
$2,512,460
$3,515,418
9
54
$250,000
$1,938,093
$4,603,546
$2,399,381
$3,525,929
10
55
$250,000
$2,079,627
$4,739,875
$2,294,826
$3,490,210
15
70
_
$2,769,824
$5,468,023
$3,091,958
$4,253,616
20
75
_
$3,598,918
$6,233,201
$3,986,735
$5,085,031
25
80
_
$4,593,699
$7,061,127
$5,033,252
$6,024,679
30
85
$5,778,355
$7,99,4370
$6,325,364
$7,141,340
(Insurance illustration obtained from highly-rated Canadian insurer whole life current dividend scale, and are not guaranteed, increases in policy cash values and policy death benefit will vary depending on the company’s future dividend scale).
Let’s look at a simplified case study showing the benefits of using corporate-owned insurance for Dr. John Jones (composite; not a real person) practicing in British Columbia. Dr. Jones is 45 years old and is expecting to work and earn active business income for another 20 years.
By moving $250,000 every year for ten years from his taxable investments to an insurance plan (the portion he allocated to the policy would have otherwise gone to conservative interest-paying investments averaging a five per cent annual rate of return), Dr. Jones reduces
10 z Canadian MoneySaver z https://www.canadianmoneysaver.ca z MAY 2022