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Don't let the tax tail wag the investment dog – The Globe and Mail

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I purchased the TD Nasdaq Index Fund (Investor Series) for my tax-free savings account through an adviser at a TD Canada Trust branch. My understanding is that the fund is subject to U.S. withholding tax, but the bank denies this. Can you settle this?

Any Canadian mutual fund or Canadian exchange-traded fund that invests in U.S. equities is generally subject to a 15-per-cent U.S. withholding tax on the underlying dividends, regardless of the account type in which the fund is held. The only way to avoid withholding tax on U.S. dividends is to: a) invest in a U.S.-listed ETF or U.S. stocks directly, and b), hold that investment in a registered retirement account. A TFSA does not qualify for the exemption.

But here’s the thing: Nobody buys the Nasdaq-100 Index (which your mutual fund tracks) for the dividends; they buy it for growth. The tech-heavy index yields just 0.7 per cent which, at a 15-per-cent withholding rate, works out to an annual tax hit of just 0.105 per cent.

Now, compare that with your mutual fund’s management expense ratio, which is 1 per cent – or nearly 10 times higher. The MER alone is more than enough to wipe out the 0.7-per-cent dividend yield from the stocks in the index, which explains why the TD Nasdaq Index Fund has paid zero distributions over the past five years (which is as far back as the data go in the most recent Annual Management Report of Fund Performance.)

So withholding tax is not your biggest enemy here.

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There are cheaper ways to invest in the Nasdaq, including TD’s own e-series Nasdaq Index Fund, which has an MER of 0.5 per cent. You could cut your costs even further by opening a self-directed discount brokerage account and investing in ETFs.

If you’re more comfortable working with an adviser, you could certainly do worse than paying an MER of 1 per cent. So I’m not suggesting you urgently need to shake things up. But I wouldn’t spend another minute worrying about a tiny amount of withholding tax on a growth-focused mutual fund.


I’m 59, and a longtime employee with one of the big telecoms. I have about $200,000 of my employer’s stock – all in my RRSP and TFSA – and an additional $50,000 from an insurance settlement that I am starting to invest. I have opened two TFSA accounts with Wealthsimple – one self-directed and one robo-adviser – and a third TFSA with Questrade’s Questwealth robo portfolios. In addition to my employer’s stock, my individual holdings include TD, Granite REIT, Vanguard’s S&P 500 Index ETF (VFV) and asset-allocation ETFs from Vanguard, iShares and Horizons. Can you provide any feedback?

First, having 80 per cent of your portfolio invested in one company violates one of the cardinal rules of investing, which is that you should diversify to control your risk. Fortunately, because all of your company shares are held in your registered retirement savings plan and tax-free savings account, you won’t incur any capital gains tax if you sell a portion of them.

My second concern is that, by opening multiple accounts at different financial institutions and buying everything from banks to real estate investment trusts to asset-allocation ETFs (from three different providers, no less) you seem to be proceeding without any sort of plan. The danger is that you will make your investments far more complicated and difficult to manage than they need to be.

Unless you have some experience managing a portfolio of stocks, you might be better off investing primarily in ETFs – either directly or through a robo-adviser – at least for now. You could, for example, get all the diversification you need with one or two asset-allocation ETFs that provide global exposure to stocks and bonds.

To save even more on costs, you could purchase individual index ETFs instead. You already own VFV, which tracks the S&P 500. For Canadian exposure, consider an ETF based on the S&P/TSX Composite Index (I discussed two examples in my column last week).

Finally, think about how many separate accounts and financial institutions you really need. Especially as you get older, you may find that the complexity becomes a burden.

With investing, less is often more. If you keep your costs down, stay diversified and keep things simple, time will do the heavy lifting for you.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

Special to The Globe and Mail

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Poland Belittles Media-Law Impact as US Warns on Investment – BNN

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(Bloomberg) — Poland played down the impact of a draft law ousting U.S.-based Discovery Inc. as a senior Washington official warned that a perceived erosion in media freedom could hit investment sentiment toward the nation.

The ruling party wants to pass legislation that will force Discovery to sell control of its Polish unit TVN, the largest privately owned television group in the country. The media regulator has also for more than a year not extended the broadcasting license for TVN24, the group’s news channel whose award-winning investigative reports have unveiled corruption at various government levels.

The draft law proposes to ban companies from outside the European Union, as well as the associated economic areas of Iceland, Liechtenstein and Norway, from directly or indirectly controlling television and radio stations. That would only impact Discovery, one of the biggest U.S. investors in Poland.

“This law only imposes the obligation to find a capital partner in the European Economic Area, and does not infringe anyone’s freedom of expression,” Marek Suski, a ruling party lawmaker and promoter of the TVN bill, told public radio on Friday. “I think that great American lawyers will find a way to do this.”

The legislation — which the ruling party wants to approve in parliament next month — has already prompted concern from the U.S. and the EU.

U.S. companies have invested more than $62 billion in Poland, second only to Germany, and provide employment for 267,000 people, according to the American Chamber of Commerce.

”This is a very significant American investment here in Poland,” Derek Chollet, a counselor at the State Department, told TVN24 in an interview during his visit to Warsaw on Thursday.

Failure to extend the Discovery unit’s broadcasting permit “will have implications for future U.S. investments. But it’s also a question of values” as “media freedom is absolutely crucial — a free press is important to empowering society,” he said.

©2021 Bloomberg L.P.

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Martin Pelletier: How anti-vaxxers can impact your investment portfolio – Financial Post

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Three things to watch for to gauge the sustainability of the post-COVID recovery

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Equity markets appear to be taking a breather as we move from early to mid-cycle in the post-COVID recovery, with market participants trying to figure out what that means and where we go from here. Many are wondering if we have seen peak earnings and peak growth, and if the rise of the variant will cause another shutdown.

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You can see this in the muted reaction to some recent impressive quarterly earnings reports in the United States, with some high expectations already priced into share prices. And then investors hit the panic button on Monday, taking the S&P 500 and S&P TSX down to 3.5 per cent from its recent high, while the Canadian dollar has now lost all of its gains and is now flat on the year.

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During these times its important to remember that markets don’t always go up and near-term volatility doesn’t necessarily imply that a looming meltdown is on the horizon. For example, did you know that we’ve counted that the S&P 500 has fallen more than two per cent eight times this year alone?

However, market corrections are quite common and can actually be quite healthy as they flush out those participants on the margin (excuse the pun) without the wherewithal to stand by their longer-term convictions. In that regard, looking ahead there are three main factors worth watching, not only as to the sustainability of this post-COVID recovery but also overreactions allowing for the opportunity to rebalance portfolios.

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The bond market

We continue to believe that this very much is still a central bank-driven market environment. Macro policy will weigh heavily as markets react to indications of where the Fed and other central banks are positioning. For example, markets corrected more than 15 per cent when Bernanke signalled tapering back in 2010, and some argue that the tech bubble was burst when Greenspan indicated hikes were coming in early 2000.

That said, this time around central banks are in a bit of a pickle with rising inflationary pressures offset by the need to keep debt servicing costs down for massive government fiscal programs currently being funded by printing money. In addition, we’ve read that there are a record amount of job openings, but wages aren’t high enough to entice those unemployed going off government assistance.

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This is where the bond market can be a good indicator and worth keeping a close eye on, but at the same time recognizing they don’t always get it right. More recently, long-term U.S. Treasuries (20 year +) have rocketed nearly 12 per cent from their May lows, nearly recouping all of their losses this year-to-date. For those overweight bonds, especially longer-dated ones, we wonder if they’re being given a rare second chance?

Oil prices

Don’t kid yourself. Despite the plethora of talk around the transition to clean energy, high oil prices still have a material impact on the economic recovery in the U.S. Five of the last six recessions have been preceded by a spike in the price of crude oil, with the only exception being the recession in 2020 caused by the COVID lockdowns.

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The good news is that WTI oil prices have fallen from last week’s highs of nearly $75.50, down more than 11 per cent to below $67 a barrel on Monday. This couldn’t come at a better time as main street is in the midst of struggling with supply chain shortages causing inflationary pressures in key household staples such as food, clothing and gasoline.

Household spending & anti-vaxxers

We received some good news out of U.S. retail sales last Friday, showing a rebound month-over-month in consumer spending, which is a primary driver of GDP growth. People are tired of being locked up and have now been given a taste of what it’s like to experience a pre-COVID world again. This also appears to be in its early stages, as U.S. households are still sitting on quite the nest egg, having accumulated trillions in excess savings during the pandemic.

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  1. Suddenly, the mighty EV is our path to salvation. Yet in the U.S. 62 per cent of the country's electrical grids run on fossil fuels and are the second-largest contributor of GHG emissions at 25 per cent.

    Want to save the planet? Invest in oil and gas stocks instead of indirectly supporting OPEC and Russia

  2. A recent Abacus Data poll showed Prime Minister Justin Trudeau may finally get the majority government he so very much desires.

    Why investors should get their portfolios in order before an election is called

  3. It appears that investors have forgotten that return and risk go hand in hand.

    Investors want both sky-high returns and the comfort of safety

  4. The U.S. Federal Reserve is extremely limited in its ability to materially raise rates given the massive amount of debt being taken on by its government to fight the COVID-19 pandemic, writes Martin Pelletier.

    Martin Pelletier: Investors are overlooking this key reason why the Fed won’t rush a rate hike

Looking forward, the trillion-dollar question, therefore, is if the stupidity of those choosing not to get vaccinated is greater than many expect, resulting in the rise of the variant this fall and forcing another lockdown. We hate to position portfolios around stupidity, but it is a risk nonetheless and worth keeping a very close eye on.

In conclusion, pullbacks are signs of a healthy market and more so, given they present a great chance to reposition and rebalance portfolios. This can be a rather difficult thing to do in today’s headline-grabbing environment, but it helps to strip out the noise, have a long-term plan and deploy some form of near-term active risk-management.

Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Critical Minerals: A New Focus For Foreign Investment Review – Energy and Natural Resources – Canada – Mondaq News Alerts

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The Canadian government has recently signalled that it will use
it national security powers to scrutinize foreign investments in
businesses involved in critical mineral production and
supply chains.

This is an important change, given the number of mining
companies listed on Canadian stock exchanges, including many that
have little nexus to Canada except for the listing.

Critical minerals

The Canadian government’s current views on the significance
of critical minerals have been developed in two recent and
important policy statements:

  • A Critical Minerals List, released on March 11,
    which includes 31 minerals considered critical for the sustainable
    economic success of Canada and its allies1. The list is
    largely consistent with a similar U.S. government list of 35
    critical mineral resources.
  • Updated guidelines on the national security review of foreign
    investments, which were released on March 24. The guidelines
    identify areas that could raise national security concerns, and now
    include acquisitions of Canadian businesses involved in producing
    critical minerals.

Critical minerals are viewed as those that are: essential to the
economy of Canada and its allies; and whose supply may be at risk
due to geological scarcity, geopolitical issues, trade policy or
other factors2. A
key concern is with market dominance by suppliers that are state
owned enterprises and the risk of politically motivated supply
disruption. Canada is not alone in expressing concerns of this
nature3.

Investment Canada Act reviews

Under the Investment Canada Act (ICA), the
government has discretion to review virtually any foreign
investment on the grounds it could be “injurious to
Canada’s national security.” The review jurisdiction is
broad and covers mining businesses with part of their operations in
Canada, even if mines themselves are located overseas.

To date, national security reviews have tended to focus on
Chinese investments involving sensitive technology, critical
infrastructure or personal data. Mining has not been an area of
significant concern under the ICA.

Acquisitions of Canadian-listed mining companies, even by
Chinese investors, have generally been viewed as non-problematic.
For example, Zijin Mining’s acquisition of Nevsun Resources,
Continental Gold and Guyana Goldfields in 2018, 2019 and 2020 and
Endeavour Mining’s acquisition of SEMAFO in 2020 were all
approved under the ICA. Nevsun was involved in critical mineral,
copper, although its acquisition pre-dates the identification of
copper as a critical mineral in March 2021.

The only mining transaction blocked on national security grounds
was Shangdong Gold’s proposed acquisition of TMAC in 2020. But
that investment was likely blocked because of TMAC’s strategic
location and other factors, not its gold mining operations. (Gold
is not on the critical minerals list.)

Other mining-rich countries have also started to scrutinize more
closely Chinese investments in the mining industry. Notably, the
Australian government blocked two proposed investments by Chinese
entities related to critical minerals in 20204.

Practical implications

The vast majority of mining investments will continue to receive
ordinary course approvals under the ICA. However, this new policy
highlights that some investments are likely to face significant
scrutiny.

The highest-risk investments will involve proposed Chinese
acquisitions of Canadian mining companies involved in the
production of critical minerals in Canada.

Lower-risk investments will involve proposed Chinese
acquisitions of Canadian-listed mining companies not involved in
critical minerals, where their assets are located outside Canada,
and/or where target businesses are not material producers of
critical minerals.

Non-Chinese investors should generally expect approvals to be
processed in the ordinary course. Indeed, an added consequence of a
more restrictive policy on Chinese investments will likely be
opportunities for non-Chinese investors and possibly in the
development of new and existing mineral projects in Canada.

Finally, when considering potential investments where national
security issues are expected to arise, investors and Canadian
businesses alike should engage counsel and government relations
advisors as early as possible in the transaction planning process
given the complex and evolving nature of the national security
review regime under the ICA.

Footnotes

1 The list comprises the following minerals: aluminum,
antimony, bismuth, cesium, chromium, cobalt, copper, fluorspar,
gallium, germanium, graphite, helium, indium, lithium, magnesium,
manganese, molybdenum, nickel, niobium, platinum group metals,
potash, rare earth elements, scandium, tantalum, tellurium, tin,
titanium, tungsten, uranium, vanadium, zinc.

2 A Canada-U.S. Joint Action Plan on Critical Minerals
Collaboration
, released in January 2020, which aims to
facilitate development of secure supply chains for critical
minerals that are key to strategic industries such as defence,
aerospace and communications. Canada is considered to be
well-placed to supply the U.S. with many of the critical minerals
due to historically strong political and economic ties; a stable
political, economic and regulatory environment; an extensive
mineral endowment; and a robust metals and mining sector. Of the 35
critical metals identified by the U.S., Canada is a sizable
supplier of 13 of such minerals, including being the largest
supplier of potash, indium, aluminum and tellurium to the U.S. and
the second-largest supplier of niobium, tungsten and magnesium.
Canada also supplies approximately one quarter of the uranium needs
of the U.S.

3 Most notably the U.S., European Union, Japan, South
Korea and Australia.

4 These investments were: (1) Chinese state-owned steel
producer, Baogang Group Investment’s proposed A$20m investment
in Northern Minerals Limited; and (2) Chinese lithium chemical
producer, Yibin Tianyi Lithium Industry Co Ltd.’s proposed
A$14.1m investment in AVZ Minerals Limited.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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