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1.) The
Safety of Mutual Fund Investments
The first Canadian mutual
fund was established more than 60 years ago.
Today, fund companies manage over
$250 billion in assets on behalf of more than 3 million
Canadian investors. One of the reasons for the continued
popularity of this investment vehicle is the extensive
regulatory framework in place to safeguard mutual fund
investments.
Some commonly asked questions about
the safety of mutual fund investments are as
follows:
How is my
investment safeguarded?
In accordance with federal and
provincial regulations, a mutual fund's assets belong to
the fund and its investors, not to the trustee, who is
responsible for administrative decisions, or the manager,
who is responsible for investment decisions. In addition,
securities regulations require that the assets of a
mutual fund must be held by a custodian, which is either
a Canadian chartered bank or trust company. The assets
are therefore protected under banking and trust
laws.
What happens
if the mutual fund's trustee, manager, or custodian
experiences financial difficulties?
Since the assets of the mutual fund
are at all times segregated from those of the fund's
trustee, manager and custodian, they are not, under any
circumstances, available for any use or purpose other
than the investment objectives of the mutual
fund.
Why
isn't my mutual fund investment covered by deposit
insurance (CDIC)?
Deposit insurance applies to
"deposits", such as guaranteed investment
certificates issued by banks and trust companies. Units
or shares of mutual funds are "securities" that
have fluctuating values, and therefore do not satisfy the
definition of a "deposit" as required by
CDIC.
Are there any
other organizations who safeguard my
investment?
The Canadian Investor Protection
Fund (CIPF) protects investors against insolvency of its
165 member firms. Its membership includes many Canadian
brokerage firms and others. The coverage limit is
$500,000 per person of which $60,000 can be uninvested
cash. Separate coverage is given for RRSPs, RRIFs, joint
and trust accounts. The protection applies to mutual
funds and all other securities as long as they are
purchased through and held by a company which is a CIPF
member. In the event of a member firm's insolvency,
the CIPF will replace an investor's securities in an
account with another member firm. If a security cannot be
replaced for any reason, the investor will be refunded
that security's fair market value at the time of the
member firm's insolvency. Please note that the CIPF
does not cover market losses. The CIPF is designed to
protect investors in the event of the insolvency of the
investment dealer.
What do
others think about the level of safety in this type of
investment?
All mutual fund investments contain
an element of risk ˜ risk that you not receive the
investment returns you anticipated when you made the
investment, or that you will lose money when it comes
time to redeem your investment. You should discuss your
investment objectives and your capacity to accept risk
carefully with us.
Assets under administration by
Canadian mutual funds continue to increase, demonstrating
consumer confidence in this fast growing sector of the
financial services industry and consumer comfort with the
relative stability of mutual funds as an investment
vehicle.
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2.)
Troubleshooting
Mutual
Funds: Resisting
the Urge to Redeem
Question:
What to
do if the stock market goes
down?
Answer:
Nothing, ignore it. The stock
market is irrelevant. Much like a spectator at a baseball
game who keeps his eye on the playing field and
occasionally glances at the scoreboard, keep your eyes on
the fundamentals. Has anything changed? The scoreboard is
the stock market and from time to time it might
malfunction.
It was Warren Buffett's mentor,
Benjamin Graham, who taught him how to think about the
stock market:
"The stock market is a manic-depressive fellow who comes
to work everyday, offering to buy something from you or
sell something to you. The more depressed Mr. Market is,
the wider his swings in his offering prices, i.e. during
the 1990 Gulf War, Mr. Market became very depressed and
scared, and offered to sell shares of Berkshire Hathaway
at $5,600. Today these shares are worth $47,500 (June
1997)."
Mr. Market should either be ignored or exploited
depending on your financial situation. This
manic-depressive fellow, therefore, should never be your
guide, but simply your servant.
Question:
What to
do about the influences exerted by market forecasters,
political forecasters, economic forecasters and
newspapers?
Answer:
Ignore them. To quote from
the 1994 Berkshire Hathaway annual report:
"We will continue to ignore
political and economic forecasts, which are an expensive
distraction for many investors and businessmen. Thirty
years ago, no one could have foreseen the huge expansion
of the Vietnam War, wage and price controls, ... the
resignation of a President, the dissolution of the Soviet
Union, a one-day drop in the Dow of 508 points, or
Treasury Bill yields fluctuating between 2.8% and
17.4%.
But surprise, none of these
blockbuster events made the slightest dent in Ben
Graham's investment principles. Nor did they render
unsound the negotiated purchases of fine businesses at
sensible prices. Imagine the cost to us, then, if we had
let the fear of unknowns cause us to defer or alter the
deployment of capital. Indeed we have usually made our
best purchases when apprehensions about some macro event
were at a peak. Fear is the foe of the faddist, but the
friend of the fundamentalist.
A different set of major shocks is
sure to occur in the next thirty years. We will neither
try to predict them nor profit from them. If we can
identify businesses similar to those we have purchased in
the past, external surprise will have little effect on
our long term results."
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3.)
Would you knowingly choose the government as a silent
partner in your company's investment
income?
If you're investing your
company's excess profits, you
may be doing just that. Here's
the problem...
In many businesses, the retained
profits or surplus cash are invested in GICs or other
taxable investments. This is often the case when the
owners don't need the extra income and have a higher
marginal tax rate than their business. But, what many
owners may not realize is that they have made the
government a silent partner in their investments since
the government will take approximately half of the
investment income in tax. Is this the most effective way
for your corporation to invest its retained
profits?
What are your
options?...
You can continue to pay tax on the
interest earned on your company's invested profits or you
can invest these profits using an investment concept
known as Corporate Estate Bond. This attractive
alternative to taxable investments is ideal for a
corporation or owner who:
can benefit from a higher immediate
estate value and ultimately from a higher tax-free death
benefit paid to heirs,
has retained earnings available for
investment, and
can benefit from a tax-deferred
investment.
The best solution...
The Corporate Estate Bond puts
these excess profits to work in an exempt life insurance
policy. This provides immediate life insurance protection
and an investment that accumulates within the policy on a
tax-deferred basis. When you die, the corporation
receives the proceeds of the policy tax free, plus a
credit to its capital dividend account (under current tax
laws). Capital dividends may then be paid out to your
estate tax-free. The Corporate Estate Bond, allows you to
move corporate investment dollars from a tax-exposed
environment to a tax-deferred one, maximizing the amount
that is available to your estate. Contact us to find out
more.
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4.)
Living Buy-Out - the Purchase of a Business
A living
buy-out is any purchase of a business (whole or part
interest) from the business owner. Living buy-outs may
take place within a shareholder group, between an owner
and third parties, between an owner and the employees, or
within the family. Planning in advance for the completion
of a living buy-out can be advantageous to both parties,
in that both will know their rights and
obligations.
The term living buy-out is used in
contrast to the more usual focus on the need for buy-sell
arrangements triggered by the death of a shareholder,
where the deceased's shares are often sold for
proceeds created by life insurance.
A living buy-out may be triggered
by the retirement of an owner, the total disability of an
owner, a disagreement between two or more owners, the
severance of an owner's employment, a claim under
provincial family law legislation against an owner, the
incarceration of an owner, or simply the desire to sell.
Note that in some of these situations, the former owner
may remain involved with the business for a period of
time after his or her ownership interest has
ended.
The potential list of triggering
events could be very long, but by providing for the
purchase and sale of shares in such circumstances, the
departing party and the remaining or new party(ies) know
their rights and responsibilities in advance. The
determination of price and the terms of payment may be
set out in the shareholdersΠagreement.
Alternatively, if a shareholders' agreement does not
cover the situation, the price and terms may be
negotiated and set out in a separate agreement of
purchase and sale.
When insurance (for example,
disability buy-out insurance) is not available to fund a
living buy-out, conventional methods need to be reviewed.
The structure of such a buy-out can take numerous forms.
The objectives of the vendor are to receive as much
money, after tax, as possible. The objectives of the
purchaser might be to pay as little as possible, ensure
that any interest paid will be tax deductible, and to
fund the principal repayments from the operations of the
company.
Most commonly, the purchaser will
personally buy the shares of the business from the
vendor. The vendor receives capital gains treatment on
the disposition, and if the business is a qualifying
small business corporation, he or she will also be able
to use any available capital gains exemption (or take
advantage of the high ACB resulting from a previous
crystallization of the capital gains exemption). The
purchaser, however, would have to borrow personally to
fund the share acquisition, and while the interest
expense should be tax-deductible, it would only be
deductible on the new owner's personal return. In
addition, the purchaser will have to take extra income
out of the business, and pay personal taxes, in order to
make the principal repayments.
Another method of structuring a
living buy-out is as follows:
The purchaser establishes a new
company and causes this new company to borrow the amount
of the purchase price from a lending institution. The
purchaser will probably be obligated to provide
sufficient collateral for the loan.
The new company buys the shares
from the departing shareholder.
The departing shareholder will get
capital treatment on the share disposition, and will be
able to take advantage of the capital gains exemption (if
available).
After the purchase is completed,
the purchaser can amalgamate the companies. The debt
becomes part of the operating company and the interest
expense should be deductible from corporate
income.
The purchaser may want to consider
the retention of any life insurance policy on the
vendor's life in order to provide security on the
loan, for key employee coverage (where the original owner
remains involved in the business), or for cost recovery.
If such life insurance does not already exist, the
purchaser may wish to acquire coverage on the
vendor's life (for example, if the vendor's
continuing involvement represents significant goodwill
for the company).
Some living buy-out situations can
and should be planned for in advance. However, even where
advance warning is not available, the techniques
described above can help accomplish the objectives of the
parties involved. Proper consultation with appropriate
professional advisors will ensure that all technical
issues are addressed.
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5.)
Business:
The
Forgotten Victim
Your Business May
Suffer
Most business owners are now aware
of one of the most significant risks facing them
everyday. That risk is disability and unlike your
employee who may run the risk of losing their paycheque
˜ as a business owner you run the risk of not only
losing a paycheque but your business as well!
From a risk management perspective
the odds of a disability striking during your earning
years run as high as 1 in 3!
Perhaps you are not aware that you
can purchase a tax deductible insurance contract to help
meet your overhead expenses in the event you are
disabled. You choose when the income starts... 30, 60 or
90 days after you become disabled. This money could be
the difference between your business surviving or
dying.
For example, let's say you are six
months into a bonded project and you've been left
seriously disabled as the result of an auto accident
˜ how would you be able to meet your overhead
commitment without your vital bottom line
contribution?
Why consider buying this coverage?
Well, as we stated at the outset, the odds are alarmingly
high. Second, overhead expenses are often fixed and
constant allowing for little flexibility from creditors
or landlords. Third, most disabilities are short term but
this protection gives you the ability to keep your
business in good financial shape until you can return.
Finally, in the unfortunate event that your recovery is
unlikely, your business will be much more attractive to a
prospective buyer because you've had the resources
to stabilize it in your absence.
The contract covers accident or
sickness, 24 hours a day. The types of expenses the
policy includes (but are not limited to):
- accounting, legal
- association or professional
dues
- automobile expenses
- employee salaries, benefits and
payroll taxes
- equipment and furniture leases
and depreciation
- principle and interest on loans
and mortgages
- property insurance
premiums
- property taxes
- rent
- supplies
- utilities
If you think this valuable risk
management tool would be of interest to you,
please call us at 604-575-7900 or Email
us!: admin@konnerlarose.com
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