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Looking At Life Insurance

Life insurance certainly isn't my favorite topic but it has become something that I've been thinking about recently. We currently don't have term life insurance, the only life insurance we have is tied to our mortgage. I know that this really isn't the most cost-effective way to be insured but I figured that getting term life insurance wouldn't be that much different.

First let me explain what I mean when I say that our life insurance is tied to our mortgage. Conveniently our bank (like most banks I assume) offers life insurance on the balance of our mortgage. The way it works is that we pay a life insurance premium based on the outstanding balance on our mortgage. If one or both of us were to die the life insurance would be paid out and it would go directly to the bank to pay off the mortgage. So that works out well, if one of us dies the mortgage will be paid off and the other one would find themselves mortgage free. If both of us were to die then the mortgage would be paid off and the estate would have the house to divide up according to the will. So that is nice and neat and works out well, right? Not quite.

Our mortgage is actually a Home Equity Line Of Credit (HELOC or LOC) and we happen to have a portion of our HELOC fixed like a regular mortgage. So instead of having a variable interest rate on that portion and having to make interest only payments the interest rate is fixed and we also have fixed payments that are calculated exactly the same way regular mortgage payments are calculated. I have been thinking about life insurance recently because I have been using a little bit of the room we had available in the HELOC to make some stock purchases (which is a strategy with a lot of risk that needs to be very carefully considered before using). This brings up the question, "If the life insurance on the mortgage is intended to pay off the mortgage but I'm using the money to invest in stocks which will (hopefully) still have value after one of us dies in ADDITION to the value in the house does it even make sense to have that life insurance?" My gut feeling is no, it doesn't. At the same time it would be nice if one of us died for the other one to not have to worry about the portion of the HELOC that we used to invest. So I thought I might need to look into term insurance rather than the mortgage insurance we have. That could give us a nice mix of advantages, slightly lower premiums and some fixed amount of coverage.

I thought I had some good reasons to be hesitant to get term life insurance instead of the mortgage life insurance we currently have. One main reason is that we plan to be mortgage free in less than 10 years so I didn't want to be locked into paying premiums for a full 10 years. We get some life insurance coverage through our jobs so having 'extra' life insurance coverage didn't seem to make sense. The other main reason is that the premiums we pay are tied to the outstanding balance on our mortgage which should be decreasing from year to year while the premiums on a term life insurance policy would be fixed for the full term of the policy (at least 10 years). I figured that the extra we were paying for the mortgage coverage would be more than compensated for by the fact that the premiums would be going down from month to month and year to year.

Since the question about whether it makes sense to have life insurance on a portion of our mortgage that was being used for investments came up I decided to take a look into what our premium would be for equivalent coverage under a term plan. After making a visit to www.kanetix.com it turns out that we can get "first to die" joint coverage for the same amount as our outstanding mortgage balance for roughly 25% of the premiums we are currently paying for our mortgage coverage. So that means that unless we plan to pay off the mortgage in less than about 2 years or so it makes more sense to get term insurance than it does to keep the mortgage insurance.

On top of the significantly lower premiums there are other benefits to having term life insurance rather than the mortgage life insurance we have. The main benefit is that with term insurance you (or your estate's executor) get to decide what to do with the insurance payout. With mortgage insurance the insurance payout goes directly to the bank and your mortgage is paid off. The money never passes through your hands. That may not seem like a big deal but having the flexibility to decide what to do with the money could be a big plus. Imagine a situation where a couple is in a car accident and one person is killed and the other person has some fairly major injuries that require either modifications to the house or some sort of expensive medical care or both. Then imagine that the couple had a really good interest rate on their mortgage and due to this combination of circumstances it would actually be cheaper to keep paying the mortgage and use the insurance money to pay for the renovations and/or medical care. I'm sure I could come up with at least 10 more situations where it could be smarter to keep the mortgage and use the insurance payout for some other fiscally sound reason. Having term insurance gives you that flexibility, having mortgage insurance doesn't.

So in the next couple of weeks I'm going to be looking at some different policies and figuring out how to get out of our current mortgage insurance. By switching to term insurance it looks like we will be saving about 75% of our current mortgage insurance bill and we will be getting greater flexibility if we are ever in the unfortunate situation of receiving a life insurance payout.
category: Personal Finance posted on Sunday November 30, 2008 at 16:31:06 by: 0xCC

Tax Free Savings Account Thoughts

Canadian Capitalist recently posted an article looking at different TSFAs currently available and some of the potential fees associated with those accounts. The comments to that article brought up some interesting points and helped me to finally solidify my opinion on what to do with a TSFA.

Just as a very quick recap when I talk about a TFSA I am talking about the Tax Free Savings account introduced in the Federal Budget in March of 2008. A TFSA will allow an individual 18 years of age or older to make up to $5000 of non-deductible contributions per calendar year starting in 2009. All gains that happen inside a TFSA (interest, capital gains, dividends, etc) are tax exempt. Withdrawals can be made at anytime from a TFSA and those withdrawals are not taxed or included as income when determining eligibility for federal income tested benefits and credits. Unused contribution room accrues from year to year. Contribution room increases by any withdrawal amounts in the year following a withdrawal.

When the budget was announced I was amazed at the opportunity provided by this new TFSA and a number of different strategies to maximize the benefit popped into my head. The first obvious strategy is to try to get some very high returns inside the account and then pull the money out to spend on something like a car or a home renovation or something like that. Trying to get very high returns implies very high risk so there would be a good chance that using that strategy would result in having less money in the account than you put into it. That didn't seem like a good strategy to me. The next thing I thought of was to just buy some solid dividend paying companies in the account and allow the dividends to build up inside the account, possibly re-investing those dividends. That seemed a little more reasonable but something about it bothered me a little bit. Part of the problem was that the trading cost of investing even as much as $5000 could take up a fairly good chunk of the first year return. Imagine that you have to pay $29 to buy into one dividend paying company and that company was paying a 5% yield when you bought in. that $29 trading cost would be a little more than 10% of your first-year dividend payments. Of course the second year looks a lot better because you wouldn't have the trading cost but still, paying 10% of your return is worse than what a mutual fund would do to you (and that is just the trading fee, any annual 'administration fees' would be on top of that depending on which institution the account is held with).

As I read through the comments on the Canadian Capitalist's post it started to dawn on me. The TFSA should be a long-term savings vehicle and it should probably change as it gets more mature. The real power of a TFSA is going to be the compounding of both the growth of the account itself (through capital gains, interest and/or dividend income) and in the growth of the contribution room. How a TFSA gets used and what it is invested in isn't set in stone from the first year. Just like some one can have multiple RSP accounts it is allowed to have multiple TFSA accounts. Although $5000 is a pretty good chunk of cash and a fair percentage of the Canadian population probably won't be able to max out their contribution room yearly as I outlined above trading and administration fees can severely eat into the returns on a relatively small amount of money.

So what to do? Look at a TFSA as an account that is going to change and probably split into different accounts over the medium to long term. In the first phase it probably makes the most sense to keep an emergency fund in a TFSA and to max out the contributions for that purpose. An emergency fund should have a bare minimum of 3 months and probably closer to 6 months or more worth of living expenses in it. I suspect that for most people even if they contribute the maximum amount of $5000 it will take 2-3 years for an individual or 1-2 years for a couple to have close to 6 months worth of living expenses built up in a TFSA (couples get to contribute $5000 each for a total of $10000 while individuals only get $5000 of contribution room and in general basic living expenses for a couple aren't double that of an individual). An emergency fund needs to be in some sort of account that is fairly easy to get access to but should also provide some sort of stable return so that the value of the emergency fund at least keeps up with inflation. Luckily there are a number of high-interest savings accounts in the Canadian financial market that meet these criteria (ING Direct, PC Financial as well as a few of the big banks offer accounts that fit into this category). I think that this is really a no-brainer for the first TFSA for the majority of people. Basically any cash under $5000 per person in Canada over the age of 18 that is currently sitting in one of these high-interest savings accounts should be moved into an equivalent TFSA in January 2009. You can pre-register for one of these accounts today so there really isn't any excuse for not making the move in January.

After a full 6+ months worth of living expenses is safely stowed away in a TFSA then it is time to start thinking about getting a little more risky with additional TFSA contributions. As I said, I suspect that for most people the contribution room for 2009 will probably be used up just by setting up an emergency fund. If you don't think you need an emergency fund then in 2009 you probably have something else you want to be saving for. Want to buy a car in the next couple of years? Make a down payment on a house? Have a wedding coming up? Have school to pay for? Have any extra cash that you think you will want to be spending in the next 3-5 years or so? All of those sorts of savings should be going into a TFSA that is of the high-interest savings account variety. For 2010 and beyond it could start to make sense to look at investing contributions to a TFSA in the markets. The constraints that I would put on cash in a TFSA that is going into the market is that costs should not exceed 1% of the initial investment. So if there is a discount brokerage account that charges an $150 administration fee for accounts under $25000 on top of $29 trading commissions (for a total fee of $179 just to buy one stock) then you should have at least $18000 to invest before considering an account like that. If you are lucky enough to have other accounts with the same discount broker that give you $0 administration fees and sub-$10 trades then investing as little as $1000 could make sense. However, all of that is a 2010 discussion.

So I just made your 2009 TFSA decision very, very simple. All you need to do is pre-register for a high-interest TFSA at your favorite financial institution. Then either take up to $5000 of the emergency fund that you already have saved and are paying income tax on the interest on anyway or start an emergency fund by making contributions to your newly opened TFSA until you reach the $5000 limit. That's all there is to it. The TFSA can get more complicated in future years but for 2009 all of your contribution room should be used either for an emergency fund or short-term savings. Now you have at least a year to figure out what to do with your 2010 TFSA contribution room.
category: Personal Finance posted on Friday November 28, 2008 at 14:55:16 by: 0xCC

Dividend Stories

I am mostly a dividend growth investor. What does that mean exactly? I look for companies that have a long history of paying out dividends as well as a history of increasing the dividends they pay out at a rate that far exceeds inflation. The recent market gyrations have provided some interesting insights to some companies and their dividend/distribution payouts.

The go-to companies for a dividend growth investor in Canada are the Canadian banks. The big 5 (or 6 if you include National Bank) Canadian banks have a very long history of paying out a dividend and increasing their dividends at a rate that exceeds inflation by a healthy margin. For example in 2001 Royal Bank paid a dividend of 69 cents over the year, in 2002 that grew to 76 cents then to 86 in 2003 and $1.01 in 2004, $1.18 in 2005, $1.44 in 2006 and $1.82 in 2007. That adds up to a 163% increase in the dividend over 7 years or a 23% per year average increase. Scotiabank has paid 62 cents, 72 cents, 84 cents, $1.10, $1.32, $1.50 and $1.74 over the same period (2001 to 2007) for a 112% increase over those 7 years or an average increase of 16% per year. Of course those were some pretty good years for the Canadian banks and shareholders should expect to benefit from good times like those. In the next couple of years shareholders may not see any dividend increases from the banks. In fact Bank of Montreal reported earnings this week and while they said that they weren't going to reduce their dividend for the next quarter they also said that they are paying out above their target payout ratio of 45%-55%. In other words, they are giving more than 55% of their net earnings in the quarter to shareholders. In the coming weeks we will get to hear the earnings reports from the other banks and it wouldn't surprise me to hear basically the same thing from them.

There have been some other sectors that have really been impacted by the current market conditions with respect to their dividend/distribution payouts. Maybe the most notable sector is the energy sector. With oil prices dropping from over $140 a barrel to under $50 the record revenues at some energy companies have dried up. Funny, we haven't heard too much out of Washington about a "Winfall Profit Tax" now that oil has dropped and at the same time it isn't the energy companies that are asking for bailouts... Canadian Oil Sands Trust was paying out $1.25 a unit for a quarter in the summer and at the end of October announced that they were going to cut that to 75 cents for the last quarter of the year, a 40% drop. If oil stays under $55 I suspect they will cut even further. Back in 2001 Canadian Oil Sands was paying out 75 cents per share in 2002 that dropped to 40 cents where it stayed until 2005 when it jumped to 50 cents, then 94 cents in 2006 and up to $1.65 in 2007. So on average they have increased their distribution 17% in the 7 year period from 2001 to 2007 but there were years where the distribution saw a 40%+ drop. In a related sector, the Pipelines there have been some distribution increases. Over the last year Enbridge Income Fund (which is different than Enbridge Inc.) has increased their distribution twice, once in May from 8 cents a unit per month to 8.6 cents a unit per month and again at the beginning of November from 8.6 cents a unit per month to 9.6 cents a unit starting in January 2009. So in the period from January 2008 to January 2009 distributions have increased 1.6 cents or 20%.

So there are some interesting situations in the market today. On the one hand the banks trying to hold on and continue paying out dividends at the current levels so they don't upset shareholders anymore than they are already upset and on the other hand you have energy companies that have been able to increase their payouts as oil prices shot up but now have to cut their pay outs back as oil prices have fallen. Then you have companies that have managed to stay fairly isolated from the market chaos and have been able to nicely increase their payouts in the face of that chaos. It just goes to show that even when following a dividend growth investment strategy it is important to stay diversified and to keep a close eye on asset allocation.
category: Personal Finance posted on Thursday November 27, 2008 at 13:58:33 by: 0xCC

Ouch

BCE announced this morning that due to an indication by the accounting firm KPMG that it isn't going to be able to provide the necessary opinion that BCE would meet the solvency test required for the leveraged buy out of BCE to take place by the December 11 deadline. BCE says in the statement that without this opinion from KMPG that the "transaction is unlikely to proceed". It looks like BCE stock is going to drop over 30% when it opens this morning. Ouch.

As I have mentioned before I own some BCE shares. I was basically making a bet that the deal would happen at a price close to the original terms of the deal of $42.75 or maybe as low as $38.00. I was hoping to make close to 25% when the deal happened but now I'm looking at probably losing 15%. BCE has said that it is going to continue to work with KPMG to hopefully get KPMG to a point where it can give a favourable post-buy out solvency opinion. I have a feeling that this major monkey wrench in the deal is going to be used as a way to change the price of the buy out to something closer to $38.00 per share instead of the $42.75 originally agreed upon.

Even if the deal completely falls through there are going to be some bright spots for current shareholders. BCE will probably pay out a special dividend in addition to re-instating its regular dividend. There could also be other companies out there that would love to buy BCE at a price much lower than $42.75 and if a deal gets done after BCE pays out a special dividend and maybe a few rounds of regular dividends the net price that current shareholders get could be very close to $42.75. The only problem is that it looks like a $42.75 price isn't going to happen in the next 3 weeks. It is going to be interesting to see what happens over the next few weeks and possibly months.
category: Personal Finance posted on Wednesday November 26, 2008 at 09:20:43 by: 0xCC

Lookng Forward

Yesterday the markets had a bit of a temper tantrum. Things were down a little bit early in the day and as the day went on the markets seemed to stabilize. Until the last hour or so of trading, at that point the bears took over and drove markets down severely. The TSX recorded its single largest one-day drop since Black Monday in October of 1987. Part of the issue appears to have been Scotiabank and TD warning of larger than expected write downs and losses in the current quarter. Another part of the issue appears to have been more concern over the global economy and those concerns helped to drive oil prices down under $50 a barrel.

I personally think that we are in a period of remarkable opportunity. Back in early 2006 I was starting to think that markets were getting a little bit ahead of themselves (the financials especially) and I started considering ways to protect our portfolio against a 10%-20% decline. I took a look at options (buying puts which would give me the right to sell our holdings at a specific price) but I wasn't confident in when to expect a correction, I just felt that one would come. As we went through 2006 things started to look good and I got caught up in the overall market sentiment and forgot about my concerns. Then came 2007 and the markets continued on their merry way and our portfolio had a pretty healthy return. Things started to stall in 2008 and we had a glimpse or two of what was to come in the spring and again in the early summer.

So what can I take away from the ride we have been on for the last 3 years? One thing is that my instincts in early 2006 were right, we were in for a correction I just never imagined it would be as severe as this. The second thing is that what we should have been doing in the time since early 2006 was really taking a hard look at our asset allocation. Part of the reason I was concerned in early 2006 was because we probably had too much of our portfolio in stocks, in fact I think we had over 90% of our assets in stocks. We are young with at least 15 years to retirement (or more accurately financial independence) but we should have been looking at getting into some bonds or T-bills. At the time bonds and T-bills didn't look all that attractive which probably should have been another indicator that they would have been worth looking at more closely. The third thing that we should have been doing was building up the cash in our accounts so that if and when the markets fell we would have cash available to put to work.

Which leads us to where we are today. I have no idea if we are close to a bottom here now and I think that in general trying to time the markets is dangerous. I think that when we look back on late 2008 and probably all of 2009 in 2014 or 2015 we will be amazed at where some ETFs were trading at and we will also be amazed at where some specific stocks were trading at. I think that some prices in the energy sector are going to look quite silly in 5-6 years (for example oil at both $145 a barrel and oil at whatever the low turns out to be here somewhere under $50 as well as strong Canadian banks with yields over 6%). Does that mean I think that markets can't get more ridiculous in the short term? No, I think that a good portion of what we are experiencing here is a combination of certain mutual funds having their hands forced by a few factors (redemptions and leverage positions come to mind) and a wide range of market participants getting forced to sell due to margin calls.

I don't believe that the markets are currently being rational in any way shape or form. I also believe that there are a number of opportunities out there for the bold and the patient that have been concerned about the market over the last 3 years and have been building up a cash position as a result. I firmly believe that some one that has done their homework and that has cash available right now will be able to look back in 2015 and be very glad they had their homework done and that they had cash. I just wish I was smart enough to have been building up cash for the last 3 years. It would have made this market much easier to live through.

Disclaimer: I am not a financial professional in any way shape or form. I express my thoughts and opinions on this blog which are based on nothing more than my gut feel which can and has been quite inaccurate. You should do your own research and consult with an accredited financial adviser before making any financial decisions.
category: Personal Finance posted on Friday November 21, 2008 at 11:16:43 by: 0xCC

Adjusted Cost Base Update

In a previous post I discussed calculating the adjusted cost base (ACB) for an investment and how I didn't know how to calculate the cost base on the units of a particular trust I own. The complication in the calculation came from a few sources. First, I never actually bought the units of Penn West that I currently own, they bought Canetic Resources last year and I got Penn West trust units because I had Canetic Resources units. I don't think I actually bought Canetic Resources units either; Canetic was formed out of a merger of Starpoint Energy and Acclaim Energy both of which I owned before the merger. Second, as part of the distributions that Penn West and Canetic (and Acclaim and Starpoint) have paid out there is a portion of the distribution which is called "Return of Capital". Return of Capital has the effect of reducing the ACB of an investment. That is easy enough to figure out because the companies have to provide a T3 tax form every year detailing what your return of capital and other income was over the tax year. Finally the big issue I was having trouble dealing with was how to deal with an RSP swap that I did. An RSP swap is a transaction where a holding (or cash) gets moved from a taxable account into an RSP and a holding (again, or cash) of equal value gets moved out of the RSP. In order to figure this all out I needed to call the Canada Revenue Agency.

So this week I called the CRA to get help on calculating my ACB on my Penn West units. I called the General Inquiry line and talked to a representative and as soon as I mentioned I need help with calculating an ACB on a stock I got transferred to another person. When I mentioned to the second person that I needed help calculation the ACB on a stock that involved an RSP swap I got transferred to another person. When I went through the details of what I needed information about the third person I talked to he asked "Is this for a self-directed RSP?". Yes, it is. "Oh, we have a whole separate department for that. I have to take your information and they will give you a call back. They have 72 hours to call you back." Ok, at least I will get an answer and I will be talking to some one that has experience with this specific area of the income tax act. Less than 24 hours later they called me back.

So here is the answer I got. Doing an RSP swap triggers a 'deemed disposition". What that means is that if you had a capital gain on the stock that you are moving into the RSP you have to claim that capital gain in the year you did the swap. If you had a capital loss on the stock you are moving into the RSP that capital loss is denied (because you still own the stock). For the stock that moves out of the RSP the adjusted cost base is the value of the stock that you moved into the RSP. So if you think about it doing an RSP swap has the same net effect as selling whatever stock you had both inside the RSP and outside the RSP and then using the cash from those transactions to buy the stock you sold in the other account.

So why bother doing a swap at all? Well at the time I did the swap I would have had to pay $29 for each trade I did. The RSP swap fee was $45 total. So 2 sell transactions and 2 buy transactions would have cost me $116 in commissions or I could have paid $45 to do the RSP swap. I was also under the mistaken impression that doing a swap would not generate capital gains but that is not the case so I'm going to have the joy of filing a T1-ADJ form.

The good side of getting this information is that it makes the ACB calculation easier than I thought it would be. All I need to know is the value of the stock that I swapped into the RSP and I use that as my 'cost' for the stock that used to be in the RSP but have been swapped out of the RSP. That is a pretty simple calculation. Now my only problem is that I have to go back and claim some capital gains that I didn't think I had to claim. I think that will end up costing me about $150 in tax and potential penalties but at least I know how to deal with an RSP swap now.

Now that I know how to deal with an RSP swap I don't think I will ever be doing an RSP swap again. Since the tax implications are the same as actually doing a sale in one account and re-purchase in the other account and since I only pay $9.99 a trade now and assuming that the RSP swap fee is still $45 I would actually end up paying $5 more to do the transaction that just makes things a little more complicated.
category: Personal Finance posted on Wednesday November 19, 2008 at 09:56:28 by: 0xCC

Deck Staining Rant

I think this is going to turn into a bit of a rant here so please bare with me...

Over the last couple of days I have been taking advantage of the unseasonably warm first week of November here in Southern Ontario (on Monday the high was around 15C, Tuesday it was almost 20C and today is supposed to be the same ) to get my deck refinished before the snow started flying. Of course I should have done this in say, September, when I woud have had a little more time and but I was stupid and didn't do it then.

I don't have a small deck. No, that would be too easy. We didn't build this deck, it was already here when we moved in about a year and a half ago. I just did the calculations on the size of the deck and it is about 520 square feet or around 48 square meters. Not small. My brother rented a condo in Toronto for a couple of years that was just over 20% bigger than our deck. Like I said, not small.

For some reason I thought that sanding the deck to get all the previous stain off would be a bad idea. I'm not sure why I thought that but I did. I think part of the reason was I thought it would be expensive to rent a floor sander which I will get to later. So I decided to go the chemical method. I bought some deck stripper stuff that promised to remove the stain and also remove the little wood fibers that usually give a deck that fuzzy look after it has been stripped. The deck stripper stuff seemed like it would be so easy. The instructions said that you slop the stuff on, let it sit for awhile until the finish starts to lift, scrub it with a deck scrubbing brush and then hose it off. Easy, right? Yeah, ok you just go ahead and believe that.

The instructions on the stripping solution said that it will lift reasonably deteriorated surface finished. What it should say is that if it looks like the finish could be scraped off with a wire brush, then the stripper should be able to take it off. After spending about 3 hours applying the solution to the deck and then using a pressure washer to wash it off I was actually able to get about 30% of the stain off the deck. I think that if I had just used the pressure washer I would have been able to get about 20% of the stain off the deck. The next day I decided to try again. So I spent another 3 hours applying the solution and washing it off. Not a whole lot of difference. By this point I had spent just over $60 on the stripping solution. Then I had to spend another $20 on a solution to clean off the stripping solution so the wood could be stained.

Total spent about $80 and approximated 8-9 hours of work.

When I was in the hardware store buying the cleaner solution I took a look at what it would cost to rent a floor sander. I had thought that a floor sander was a big bulky thing that would cost over $100 to rent for a day and that wouldn't fit in the trunk of a car. The floor sander I saw was much smaller than I thought (I think the sanding drum was probably 8-9 inches wide, I was imagining a sanding drum about 16-18 inches wide) and I think it would fit in a reasonable sized car trunk (provided the back seats fold down). It would almost definitely fit in the trunk of my Jetta with the back seats down. And the kicker? It costs just over $50 to rent for 24 hours.

I think that in the time it took me to pressure wash the deck once I could have had the entire deck sanded. Even if it took me twice as long as pressure washing the deck I would have been further ahead time wise because I had to wash the deck 3 times total and I had to apply the stripping solution before I washed it off. So for the price that I paid for the stripping solution I could have rented the sander. Then I would have had to pay for the actual sandpaper but I wouldn't expect that to cost more than say $15-$20 and it would have saved me at least 4 hours of time. That's less than minimum wage!

Maybe it wasn't warm enough to use the stripping solution, maybe the wood wasn't dry enough when I started, maybe the deck could have survived the winter with just some minor stain touch ups, I don't know. I do know that I am never going to attempt to use a chemical stripper on my deck again. I'll spend the $50 and rent a floor sander so that I can actually get the whole deck ready for a new coat of stain in a day instead of spending 2 days and having to wonder if I got enough of the old stain off for the new stain to stick properly.

So my advice to anyone looking to refinish their deck (which for most people probably won't be until the spring now) is just rent a floor sander. If your deck is bigger than around 150 square feet (15 square meters) the expense of the floor sander will be about the same as the expense of the stripping solution but the sander should actually work and you don't have to worry if it is too cold or if the wood isn't quite dry enough or if the sun comes out and drys up the solution before the finish is lifted or, or, or... Just sand it and save yourself a whole lot of aggravation. I know next time that's what I'll be doing. Either that or replacing the deck boards with that wood composite stuff that doesn't need staining.
category: General posted on Wednesday November 05, 2008 at 09:22:48 by: 0xCC

Detemining Adjusted Cost Base

I'm starting to look into doing some tax loss selling. I know I am going to have some capital gains this year (I have some BCE shares and I fully expect the sale to the Ontario Teacher's Pension Plan to go through, maybe not at $42.75 but I am confident it will go through). I don't want to have to pay capital gains tax when that deal does go though. The only way to avoid that is to realize some capital losses. Fortunately (or unfortunately depending on which side of the coin you look at) I don't have to look too far to find some unrealized capital losses in my non-registered portfolio. I do still have a problem though. I don't really know what my Adjusted Cost Base (ACB) is on some of the shares that I own.

First a little primer on what exactly ACB is. The simple answer is if you take all the money you used to buy a stock and divided that number by the total number of shares that you own you get the per-share ACB for the stock. So if you bought 100 shares of XYZ company for $10/share and then 6 months later you bought 200 shares for $12.50 a share you have a total of 300 shares that cost you $3500 or $11.67 a share ($3500/300 = 11.67). You can also throw commissions in the cost but on the tax form commissions are in a separate column so it is probably easier to keep those separate. Now if you were to sell 100 of those shares for $15 each you would have a total capital gains of ($15-11.67)*100 = $333. On the other hand, if you sold 100 of those shares for $10 you would have a capital loss of (10 - 11.67)*100 = $167. The important thing to note is that generating capital gains or losses is done on an average of the per-share cost for acquiring the shares, not on a first bought, first sold or a last bought, last sold basis. In other words, even though you could think about the selling of 100 shares at $10 in the previous example as not generating a capital loss because the original purchase was at $10, it does generate a loss because of the ACB rules.

So what could be more simple than that? As tax calculations go there aren't too many calculations that get that straightforward. Except if you happen to own a trust that pays out a distribution that includes a return of capital portion. Some trusts can pass along some income in the form of what is called return of capital. This is a good way to receive income in a non-registered account because what return of capital does is lower your ACB. Why is this good? As long as you don't sell the units that are giving you a return of capital as part of their distribution you don't have to pay any tax on that portion of the distribution until you have received enough return of capital that your ACB is down to $0.

So if we continue to use the XYZ company from above and we say that XYZ company pays out a distribution that over the course of a year totals $0.50. The company or trust tells you as an investor that $0.20 of that $0.50 is return of capital (you should get this information on a T3 slip in March or April each year). Well what that means is that your ACB on those shares or units that you own has dropped from $11.67 a share to $11.47 a share. You wouldn't pay any tax on that return of capital portion until you sold the shares and realized a capital gain. If you happen to sell those shares at less than your ACB you would be able to claim a capital loss (to use to reduce other capital gains you may have, you can't use capital losses to reduce earned income).

So why don't I know what my ACB is on some shares that I own. Well, because I never bought the units I currently own. I have some units of Penn West Energy. Last year Penn West bought Canetic Resources and I owned units of Canetic Resources. Ok, so I should be able to figure out my ACB on the Canetic Resources units, right? You would think so but I never bought any units of Canetic Resources either. I bought units of Acclaim Energy trust and Starpoint Energy trust which merged to form Canetic Resources and a spin-off company called Tri Star Oil and Gas. To complicate things even further I did a swap with a US dividend paying stock that I had outside my RSP for some Acclaim shares I had inside my RSP. Doing the swap didn't have any tax impact in the year that I did it (to the best of my knowledge) but I don't know what to use as the ACB for those Acclaim shares. In addition to all that Acclaim, Starpoint, Canetic and Penn West have all been paying me distributions over the last 4 years that have some return of capital component to them.

In order to get this all figured out I am going to have to make a call to the Canada Revenue Agency. My biggest question is how to deal with the RSP swap that I did. I'll write a post about how I finally unraveled this confusing ACB calculation when I finally get it figured out, which I hope is sometime this week.
category: Personal Finance posted on Monday November 03, 2008 at 09:17:06 by: 0xCC