Skip to main content

It’s been a while since I’ve responded to your questions so let’s get to some of them now.

TFSA withdrawal

Q – In a recent tax tip article in the paper. it advised to withdraw funds from a TFSA in December and then add them back to the next year’s contribution limit. It didn’t explain why this would be beneficial.Is it?If so please explain.
- Barry D.,
Duncan BC

A – The only tax advantage I can think of is a situation where you need some cash in December (Christmas shopping and all) and you don’t want to receive if from a taxable source, such as a RRIF, RRSP, or, if you’re a business owner, salary or dividends. A TFSA withdrawal provides the cash you need at the time on a tax-free basis. The withdrawal amount will then be added to your contribution room in the New Year. – G.P.

Converting RRSP

Q - My wife has turned 71 this year and has to convert her $300,000 RRSP to a RRIF. I was going to use the Mawer Balanced Fund. What is your current opinion of this fund? Also, with the strong emphasis on bonds in a rising rate environment, would my wife be better to own pure equity funds (no bond portion) and put maybe 50 per cent into GICs or cashable GICs. Look forward to your answer. – Robert B.

A - I like the Mawer fund and continue to recommend it. It has posted above-average results over all time frames. But your idea of an equity portfolio supported by laddered or cashable GICs would also work in a rising interest rate environment and would have less downside risk than bonds. – G.P.

Purpose funds

Q – My financial adviser has me invested in a variety of Purpose Funds. I do not think they are doing well but my advisor claims they are paying me dividends. I don’t see how they are. Can you please advise if they are a good investment? – Ramona K., South Surrey, B.C.

A – Purpose Investments is a well-run company, founded by Som Seif, who is considered to be one of the top innovators in the wealth management business. The company offers a wide range of mutual fund and ETF products and some, as you might expect, are performing better than others.

You refer to dividends, so perhaps one of the funds you own is Purpose Core Dividend. It does indeed pay a nice monthly dividend of 8.19 cents per unit (about 98 cents per year at the current rate for a 4.1-per-cent yield). However, the total return is well below average for its category over all time frames. The three-year average annual compound rate of return to the end of September was 5.6 per cent, compared to 9.1 per cent for its category (A units). Year-to-date, it is down 6.3 per cent. If this is one of the funds you own, my advice is to look for something else.

A better bet if you’re interested in income might be the Purpose Multi-Asset Income Fund. It invests in seven other Purpose funds plus some of the major banks. It hasn’t been around for long but it gained 5.7 per cent in the year to Sept. 30 (A units), compared to 4.3 per cent for its peer group. The monthly distribution is 4.2 cents per unit (about 50 cents a year), to yield 5.1 per cent. There is also an ETF version of this fund that has a lower management fee. It trades at a higher price but the distributions are double those of the mutual fund units.

Overall, I found the majority of the Purpose funds I looked at were performing below the category average. So, don’t feel you are committed to this organization. Ask your advisor for alternative suggestions from other companies and check out the total returns, cash flow, and costs of those he recommends. – G.P.

Bond funds

Q – Our financial adviser at one of the big banks has placed a large portion of my RRSP into a bond fund. That bond fund over the past 2-3 years has consistently lost money. I am currently down about $3,500. Why do financial advisers place investor money in these bond funds? After the MER, he is earning about 2.5 per cent with the three other funds in my portfolio. The three other funds are invested in equities. What is your view of the investment of our money in the bond fund? – Richard C.

A – Fixed income (bond) funds are typically part of a balanced portfolio. They provide stability in the event of a major pullback in the stock markets. The downside is that bond values fall as interest rates rise and that’s the environment we are in right now. It’s the direct opposite to the profits these funds produced when interest rates declined sharply after the crash of 2008.

That said, you should check to see what type of bond fund you are holding. The average annual three-year return for a Canadian fixed income fund to Sept. 30 was 0.87 per cent. Global fixed income funds did a little better, at 1.31 per cent. That’s not a lot, but it’s not a loss either. Did you count the distributions you received when calculating your loss?

If you don’t want to keep holding the bond funds, tell your adviser to switch. He would probably gladly accommodate you; he gets a higher trailer commission from an equity fund than from a fixed income fund. But keep in mind that, if you may that move, you are exposing yourself to greater losses if the stock market continues its current downtrend. – G.P.

Rate increases

Q – I need to better understand the impact of interest increases for banks and utilities. Yesterday, I heard an analyst saying that the drop in Canadian bank shares was due to anticipated interest increases. Today, I just saw news saying that JPMorgan profits were helped by higher rates. I am confused.

Also, please explain me what sectors of economy are best positioned to profit of the forecasted interest increases and what sectors will be hurt the most. – Marcel B.

A – Banks normally benefit from higher rates because it allows them to increase their spreads – the difference between the interest they pay on deposits and GICs and the amount they charge borrowers. This is technically known as net interest margin (NIM).

Insurance companies also normally benefit from higher rates, for slightly different reasons.

However, this is a broad guideline. Other factors also come into play when assessing individual companies. For example, some analysts believe Canadian banks are carrying more mortgage risk than is reflected in the price and that has contributed to keep a lid on share values. Individual banks may also have specific problems – Scotiabank’s exposure to emerging markets in Latin America and Asia has weighed on the stock in recent months.

So, while it is true that rising interest rates are beneficial to bank profits, they are not the entire story. You need to look at other aspects of the business as well.

As for utilities, they have always been considered to be interest sensitive for two reasons. First, they tend to have high levels of debt because of the borrowing costs incurred in building corporate infrastructure. Higher rates translate into more interest expense, which lowers profits.

Second, when rates on safe government bonds rise, investors demand higher yields from utility stocks because of the extra risk they carry. That tends to have a downward effect on the share price, which pushes up the yield. A $1 per year payout on a $30 stock yields a 3.3-per-cent return. That may be good enough in a period of low interest rates. But when bond rates rise, investors may feel that the same stock must yield 4 per cent to be attractive. That would push the price down to $25, unless the company hiked the dividend.

Again, there can be exceptions. But the fact the S&P/TSX Capped Utilities Index is down about 12 per cent year-to-date is a clear indication of the influence of rate increases.

I can’t suggest any sectors apart from banks and insurers that would normally profit from rate increases. One sector that is likely to be hurt is homebuilders, as higher rates make mortgages less affordable. Automakers and parts manufacturers are also vulnerable as rising borrowing costs make car financing more expensive.

Companies with little or no debt are the least exposed to higher costs. – G.P.


If you have a money question, please send it to me at and write “Globe question” in the subject line. I can’t guarantee a personal response but I’ll answer the most interesting questions in this space from time to time.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.