Waters & Meredith

Serving Niagara..

Client Information Newsletter: 4th Quarter 2001

CONTENTS

  • Investment Theories
  • The Warren Buffet Plan
  • Mutual Funds
  • Income Tax on Investments
  • Clawbacks
  • CCRA Fourth Quarter Interest Rates
  • Charitable Giving
    		•

    INVESTMENT THEORIES

    1. The Warren Buffet School of Investing is to pick a small number of world-class companies and hold their shares "forever".


    2. A different school suggests investing in mutual funds.

    Back to Contents

    THE WARREN BUFFET PLAN

    1. In our experience, this does not work for most investors because they do not have the time or inclination to find the small number of stocks for their financial future.


    2. There are mutual funds that invest this way.


    3. From an income tax perspective, there is an advantage to this type of investing. You do not pay income tax on a gain until the stock is sold.


    4. If you or the mutual fund is correct with the picks, the gains may be greater than by investing in a large number of stocks to achieve an average gain.


    5. The other side of larger gains is that by concentrating the investments in a small number of investments, you also increase your risk.

    Back to Contents

    MUTUAL FUNDS

    1. Mutual funds are often misunderstood. They are not just stock or equity investments.


    2. Anyone wishing to further their understanding of the different types of investments held in mutual funds should consider acquiring:

      (a) one of the national newspapers when it has the mutual fund listings showing the returns over a number of years

      (b) the Investors Digest which shows information on the publication's top 100 funds in Canada


    3. Most of the funds have websites which provide details to assist in decision making.


    4. We recommend an investment adviser or financial planner be consulted by most people wishing to invest.


    5. Some mutual funds subscribe to the buy and hold theory. This will delay the payment of income tax until the investor sells the funds.


    6. Many equity funds are active traders. The fund will make "distributions" to the investor. Income tax is due on the gains in the year of the "distribution". In most cases the investor pays income tax but receives no cash as the fund buys more units for the investors with the "distribution".


    7. Balanced mutual funds will invest in equities (shares) for growth, shares for income (dividends) and bonds for income. The main purposes of balanced funds is to generate income and reduce the volatility of simply investing in equities.

    INCOME TAX ON INVESTMENTS

    1. Interest from bonds or investment certificates are taxed at the graduated rates. This type of income has no tax advantage.


    2. Dividends received from Canadian corporations are taxed at lower rates than interest. For individuals at low income levels, the tax could be zero.


    3. Only 50% of capital gains are subject to income tax. That means if a person has $5,000 in interest, the income tax may be twice as much as the income tax on a $5,000 capital gain.


    4. The systematic withdrawal plans available with mutual funds is worth discussing with a financial advisor.

    CLAWBACKS

    1. There are two (2) claw-backs for any taxpayer to consider when the taxpayer is 65 or older.


    2. There is the clawback of the Old Age Pension when a taxpayer's net income exceeds $55,309 in 2001.


    3. There is also a reduction of the senior's credit when the net income exceeds $26,941 in 2001.

    CCRA FOURTH QUARTER INTEREST RATES

    1. The interest rates announced for the fourth quarter of 2001 are:

      - 9% charged on overdue taxes, CPP, EI premiums including insufficient monthly corporate or quarterly personal instalments

      - 5% to calculate benefits for employees and shareholders on interest-free and low-interest loans

    CHARITABLE GIVING

    1. For anyone interested in charitable giving who has appreciated capital assets (eg. bank stocks, mutual funds or shares or life insurance companies received on demutualization), there are substantial tax savings possible.


    2. Assume stocks with a cost of $20,000 presently worth $35,000.


    3. The income tax on the capital gain is based on one-quarter rather than one-half of the capital gain. For example, income over $100,000, tax on $15,000 capital gain is 46.4% x 1/4 x $15,000 = $1,740). Tax reduction on $35,000 donation is $16,240.


    4. If the shares were acquired on the demutualization of a life insurance company, the cost base of the shares is zero. Using the previous example, income over $100,000, tax on $35,000 capital gain is 46.4% x 1/4 x $35,000 = $4,060. Tax reduction on $35,000 donation is $16,240.


    5. The approximate tax rate on capital gains of appreciated capital assets is:


      6. IncomeTax Rate
      $0 - $31,00011.1%
      $31,000 - $54,00015.6%
      $54,000 - $62,00016.6%
      $62,000 - $100,00021.7%
      over $100,00023.2%

    6. The income tax reduction on total charitable donations over $200 is approximately 46%.

    We welcome comments you may have on this newsletter as well as suggestions for future topics.

    The information herein is provided for your general information and action should not be taken on the basis of this newsletter, but only on the advice of your own individual advisor, applying this advice to your individual situation. Please call if you have any questions.

    Waters & Meredith
    Chartered Accountants
    Telephone: 905-356-4324
    Fax: 905-356-0964
    E-mail: wm@watersmeredith.com

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