Your financial questions have been piling up in my inbox, so let's take some time now to answer some of the most interesting ones.
Prospects for Canopy Growth
Q - First of all let me say that my wife and I have subscribed to your newsletter for years and are very happy with the advice that your team provides.
My question is about Canopy Growth Corp. (CGC-T). I was wondering what your overall impression of this company is in terms of investment. There has been a lot of hype in the news lately that has led to an increase in the stock price but I am wondering if this is just hype or does the company actually substantiate the increase. – Justin C.
A - Canopy is a medicinal cannabis company, based in Smiths Falls, Ont. Its share price has increased by more than 250 per cent in the past 12 months. The company may have great growth potential if the federal government legalizes marijuana, but I don't like the current financials. The latest quarterly report showed a $3.9-million loss on $7-million in revenue. It's not a stock I would recommend at this time.
Q - My son and his wife have just returned to Canada after living abroad for several years. They have opened TFSA accounts and I want to give them a head start on investing by transferring in kind some assets from a TFSA account I have to their accounts. This would be a gift, not a loan. We all deal with the same discount broker so that institution would handle the transfer.
The question is: Is this gift transfer allowable? Can it made without incurring any taxes on my part? Does the annual $5,500 limit apply or can the transfer in kind exceed that amount? – Gerry G.
A – Sorry, this idea won't fly. All TFSA accounts are the personal assets of the plan owner. There is no provision for transferring money or securities from one person's plan to that of someone else, even if they are married.
If your son and his wife have not maxed out their contribution limit, you could withdraw some money from your own account, tax-free, and give it to them to deposit in theirs, up to their allowed maximum. That's about all I can suggest.
Buying mutual funds
Q - I've been told that buying into a mutual fund in November or early December is a bad idea because fund companies issue tax statements around mid December and you will be given a tax statement as if you were a shareholder for the full year. Does this mean you will be accountable to pay capital gains taxes on proceeds you did not receive? Alternatively, does it make sense to sell in late November and buy the fund back mid-December after the tax statement was issued? – Bob K.
A – The real issue is not tax statements but year-end distributions. Many funds (but not all) pay a year-end distribution around mid-December that usually represents crystallized capital gains. If you hold fund units at that time, you receive the payment but you're also on the hook for the tax on that money if your account is not in a TFSA, RRSP, RRIF, etc.
If you buy the units shortly before the distribution, you could end up paying tax on money you didn't actually receive. Here's how. Suppose you bought 100 units of a fund for $10 each on Dec. 10. On Dec. 15, the fund declares a year-end distribution of $1 per unit. That amount comes off the net asset value of the fund, reducing it to $9. Now you own 100 units with a value of $900 plus you have $100 in cash. You haven't made any money, but in the eyes of the Canada Revenue Agency you now have $100 in taxable income.
If you want to buy fund units around year-end, there are three ways to avoid this.
1. Buy the units in a registered plan.
2. Wait until after the distribution has been paid.
3. Check with your adviser or the fund company to see if a December distribution is likely. If it is not, go ahead with the purchase.
You also asked about whether it is wise to sell in November or December before the year-end distribution. If you have held the fund for a while, probably not. If you have a profit, you'll be taxed on the capital gain if you sell. And if you want to buy back later, you may have to pay a sales commission.
Wants to earn 30 per cent on his money
Q – I opened a TFSA roughly a year ago and have $10,000 earning 0.50-per-cent interest. Right now, I have an opportunity to earn 30 per cent on the money and so my question is if I withdraw it from my TFSA will I get penalized? Looking forward to hearing from you! –Jaisal P.
A – There is no penalty for withdrawing money from a TFSA, assuming it is not in a locked-in GIC. Based on the interest you are receiving that does not appear to be the case; your investment is probably sitting in a savings account. You can therefore take it out at any time and the withdrawal will be added to next year's contribution room. There are no tax consequences.
But before you act, think about this very carefully and ask a lot of questions. No conventional investment is offering a 30 per cent return. Whatever you are considering must, by definition, come with a high level of risk. Find out exactly what this risk entails and then decide whether you are comfortable with it.
Also, ask why you cannot make the investment within the TFSA, which would protect any profit from tax. If the security is not eligible for a TFSA, that's another signal to be ultra-cautious. – G.P.
Mutual fund questions
Q - I had several questions regarding mutual funds.
1) Are MER's (management expense rations) paid yearly?
2) Is 1.90 per cent reasonable for an MER?
3) Most funds offer 4-6 per cent. The rate of inflation is 2 per cent and 1.9 per cent MER on top that leaves quite a small gain.
4) Are there any funds that come with lower fees? – Bill K.
A – Here are your answers.
1) MERs are deducted from assets of the fund at the rate of 1/12 of the annual amount per month.
2) MERs vary significantly with the type of fund. A 1.9 per cent MER would be on the low side for an equity fund but high for a bond fund.
3) You say most funds "offer" 4-6 per cent. That's not the case. They "offer" nothing. I believe you are referring to an annual return. The average Canadian equity fund returned 8 per cent per year in the five years to Sept. 30. The average U.S. equity fund was up 16.6 per cent per year in the same period.
4) The published returns of mutual funds are net of fees. The performance figure is your actual return after fund charges and expenses.
5) The inflation rate in Canada right now is 1.1 per cent, not 2 per cent. That's the Bank of Canada target but we haven't been that high in several years.
6) There are many fund companies that offer lower fees. They include Steadyhand, Mawer, Beutel Goodman, and Leith Wheeler, among others.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.