Briefly, these trusts are designed to provide an income stream that is higher than you would receive from conventional fixed-income securities like GICs or bonds. In some cases, such as royalty trusts that are based on the energy sector, you're looking at current yields in the 10% - 15% range. Some (or sometimes all) of that income is received on a tax-deferred basis, which means you don't have to pay anything to the government at the time you collect. However, if you sell your units in the future, your liability for tax on capital gains will be higher which is why we use the term "tax-deferred" rather than "tax-sheltered".

The disadvantages start with the fact that the income stream is not guaranteed. These are not government bonds we're talking about. For example, the Luscar Coal Income Fund has suspended all payments to unit holders because the depressed price of coal has eaten away its profits. Also, unit values can fluctuation dramatically. These shares are traded on the TSE, and will rise or fall in value depending on how well the trust is doing. So you're taking on extra risk for the additional income. You have to decide if the trade-off is worth it. - G.P.

Briefly, most reverse mortgages in Canada are made available under the Canadian Home Income Plan (CHIP) and are distributed through several major banks. You take a mortgage on your home and receive a lump sum payment which can then be invested in an annuity for tax-free income (the rules that make this possible are complicated, but they work). You make no payments against the mortgage. Instead, the accrued interest is added to the principal, thereby increasing the liability against the home. When the last surviving spouse dies, the property is sold, the bank is repaid, and if any money is left over it goes to the heirs.

Reverse mortgages work best for people over 70. Before applying for one, I suggest you review the terms carefully with a lawyer and discuss the matter with the family. The children might prefer to give their parents a monthly allowance rather than see the family home encumbered in this way.

The Canada Trust line of credit you refer to is in no way like a reverse mortgage. It is simply a home equity loan. Virtually every financial insitution offers these in some form or another. - G.P.

The reason is that no one can predict with certainty which funds will outperform over time. We do our best based on historical results, managerial track records, style, volatility and the like, but there are no guarantees.

Having two separate RRSPs provides the opportunity for diversification. If a fund in one plan doesn't do well, perhaps its counterpart in the other plan will make up for it.

For example, suppose it were decided that a global value fund should be part of both portfolios. One portfolio might have held Templeton Growth Fund, which had a very poor year, gaining just 0.9% for the 12 months to July 31. The other might have held AGF International Value Fund. Its performance wasn't sensational (value funds have been out of favour), but its one-year gain was 8.6%, a heck of a lot better than Templeton produced. If both plans had been in the Templeton fund, it would have been a pretty miserable year.

Now suppose a Canadian growth fund was also part of the overall portfolio mix. One RRSP held AGF Canadian Stock Fund. One-year gain: 50.8%. The other held Universal Canadian Growth Fund. One year gain: 18.5%. Big difference!

Diversification is the key to successful investing. When you have an opportunity to buy two good funds instead of one, take it. - G.P.

If the time horizon is relatively short (three years or less) and safety of principal is paramount, the money should be invested in ultra low risk securities like GICs. If he's prepared to sacrifice some potential income in exchange for possible higher returns, he could choose an index-linked GIC that guarantees full return of principal. But there may be no interest paid if the stock market does poorly.

The best investment he could make would be to keep the money in something safe until he starts working and then use it for RRSP contributions. - G.P.

I was told, and it is being repeated to me again and again, that mutual funds are a long term investment. I don't know how long is long enough for them to notice that my account is steadily shrinking, albeit it slowly. But the set of funds they purchased for me should by now show the broker that those funds will never repay even the capital invested in them, let alone bring some gains. After 36 to 48 months in the funds, my investment is today worth less then the capital invested there and I believe I have the right to call it a scam.

Another mantra the broker keeps repeating is that my particular mutual funds depend on the Dow for gains. When I ask questions, he changes the mantra to say that I depend in fact more on the TSE.

The market however gives the lie to both claims because when I invested the money, both the Dow and the TSE were at about the 7,000 level and today they are at the 11,000 level. Yet my investment in those recommended funds not only didn't grow accordingly, but they are worth today less then the capital invested in them.

Our portfolios are small, but that's all we have at this late age in life and at this state of affairs.

I am ready to take my losses and run. But I remember they told me that I can't get my investment back for three years. That keeps changing and now I am told it is there for six years. What should I do? - M.M.

I also find it strange that you are apparently locked in to your investments. This is not typical of mutual funds; they can normally be bought and sold within a business day. It sounds like you are holding some type of security that is not a mutual fund at all. Perhaps it is some type of market-indexed GIC?

In your situation, may I suggest the following approach. Call the office of the brokerage firm you are dealing with and ask for an appointment with the manager. At the meeting, review the portfolio performance and make your dissatisfaction with the results clear. Find out exactly what you are invested in and why you don't have the liquidity that normally applies to mutual funds. Try to determine with the manager where the problem lies. Discuss alternatives, including moving your account to another broker within the firm who may be better tuned to your needs. It is always easier to make a switch within a company than to transfer an account to a completely different firm.

Alternatively, or conjointly, set up an appointment with a fee-for-service financial planner, one who does not sell securities so has no vested interest in trying to earn commissions from you. Ask him or her to review your portfolio and to make recommendations. This may also be helpful in determining your direction. - G.P.

I know that my other mutual funds held inside and outside my RRSP carry a penalty for "early" redemption. This is a good restriction for more than one reason. But do dividend funds (more specifically CT/TD dividend funds) allow for the same flexibility and low/zero cost of regular selling that money market funds do? - J.K.

However, there's a larger question here. I am certainly not advocating dividend funds as a short-term holding place for emergency cash. In my comments, I was discussing the chances of loss over a long period, five to ten years. Short-term, dividend funds can be subject to significant swings (up or down) in net asset value. That's because many invest primarily in interest-sensitive stocks, such as banks. When those stocks hit a rough patch, as they did last year, a dividend fund can take a hit. Historically, we know that these funds recover over time from such losses and do well. But you certainly should not be investing emergency money that you may need quickly in something like this. These are for long-term investors only. - G.P.

First, you will be liable for tax at the capital gains rate if you sell the Nortel shares. The trick is figuring out what you owe.

Start with the original purchase price of your BCE shares, prior to the Nortel spin-off. To make this simple, let's say you paid $100 a share. Each "new" (post-spin-off) BCE share is allocated 30.79% of that amount. So the adjusted cost base (ACB) of your $100 BCE share is now $30.79.

The Nortel adjusted cost base is 69.21%, or $69.21 based on an original purchase price of $100. However, you received 1.57 Nortel shares for each BCE share. So the ACB for each Nortel share in this example is $69.21 divided by 1.57, or $44.08.

Plug in your own original BCE price to do your personal calculation. You then subtract that ACB from the net amount you receive from the sale of the Nortel shares. The difference is subject to tax at the capital gains rate (which means only 2/3 of the profit is included in income). - G.P.

As you are aware as a subscriber, we currently have several funds of this type on the Mutual Funds Update Recommended List. Among them is the Guardian Monthly High Income Fund, which you mention and which is one of the best of this type as far as I am concerned. I like the broad diversification of the portfolio, the good cash flow and the tax advantages that are available if the fund is held outside a registered plan. The Atlas fund is much newer, but its initial results look good. - G.P.

There's a full chapter on this subject in my 2000 Buyer's Guide to RRSPs if you want more details. - G.P.

Insurance premiums would be expensive (assuming you are still insurable) but the advantage is that the proceeds from an insurance policy are tax-free. Another possibility is to invest the money in a principal residence, if you don't have one or are still carrying a mortgage. That too is tax-free and your heirs could then sell the property (or borrow against it) to satisfy the tax bill.

Yet another approach is to simply give the $2,000 a year to your heirs and let them invest the money however they wish - maybe paying off their own mortgage. There's no tax on gifts to adults in this country. Tell them the government will tax the RRIF heavily so you're making up for some of that in advance. - G.P.

1) The person making the gift, the donor, must have had the intent to do so

2) The recipient must have accepted the gift

3) The gift must be irrevocable

There are several types of gifts, including outright transfer of property, transfers to an irrevocable trust, and creation of joint ownership.

A gift will avoid probate fees, but may well create other problems. If the recipient is a spouse or a related minor, any income from the property will be attributed back to you, and will be taxed in your hands. If the recipient is anyone other than your spouse, you are deemed to have disposed of the property, and to have received the proceeds from the sale, at the fair market value of the property. This will trigger either a capital gain or a capital loss. So, as you can see, gift giving may not be as simple as it first appears. - G. PIERCE Newman

Unfortunately, the tax laws state that if you switch from one fund to another, even within the same organization, the transaction is considered a sale for tax purposes and you are liable for tax at the capital gains rate on any profits that have not already been taxed. There is no way around this - even moving the fund assets into an RRSP is a deemed sale.

That's why some companies (C.I., AGF, AIM) have created "umbrella funds". These are made up of several sections, each a mini-fund in its own right. You can switch your assets around under this "umbrella" without it being a deemed sale for tax purposes. For non-registered portfolios, it's worth a close look. - G.P.

However, the idea has never caught on here. There are no Canadian equivalents. And there is no point buying the U.S. bonds, because they are not tax-free under Canadian law. You'd be getting a lower rate of interest and still have to pay the tax. - G.P.

I don't have the space here to analyze all these programs for you in detail. They all have their advantages and disadvantages. Before you make a decision, you may wish to read my book Head Start which deals with all these issues in depth and contains specific descriptions of the scholarship trust plans you mention. It can be purchased through my Web site bookstore (www.gordonpape.com). - G.P.

Advantages? The satisfaction of, in effect, paying your mortgage interest to yourself and the certainty of the return. Disadvantages are the high costs involved and the relatively low rate of return for your RRSP. There is a full chapter on this subject in Gordon Pape's 2000 Buyer's Guide to RRSPs. - G.P.

On reviewing a graph of my market values between Feb. 28 1999 and Feb. 29 2000 I can verify a one-year gain of !5.7%. The time period seems to have been carefully selected to maximize the greatest difference in market prices. If you average the one-year gains over the six month period from Nov. 30, ‘99 to May 31, ‘00 it would be 9.6%, a far cry from 18.5% claim. As we approach the third anniversary of owning this fund I cannot reconcile the difference between the alleged increase of 6.3% and our 11% loss. I am going to be very interested in seeing their next performance summary.

My questions are:

A. Is it common practice for the mutual fund companies to select the time frames for performance summaries to take advantage of abnormally high or low market prices thereby inflating their gains over and above those realized by the majority of their clients ?

B. How do the independent sources of mutual fund performance evaluations determine gains or losses ?

C. Are there any regulations regarding the accuracy of claims made by the mutual fund companies ? - D.M., Niagara-on-the-Lake, ON

1) While companies can be somewhat selective as to the time frames they use in their advertising, the numbers must be current within six months and they must show returns for all relevant time periods.

2) To the best of my knowledge, all the companies that compile mutual fund performance data rely on statistical input from the fund companies themselves.

3) All fund companies are under the regulation of the appropriate provincial securities commission. If they were found to be manipulating data, the penalties would be very severe.

Usually, performance variations such as you report are simply a matter of timing. Often just a week or two in the placement of an investment can make a huge difference if markets make a big move, up or down, in that period. - G.P.

14. In accordance with paragraph 4900(1)(e) of the Regulations, a warrant or right listed on a prescribed stock exchange in Canada or after February 24, 1985, on the Toronto Futures Exchange, giving its owner the right to acquire property, is a qualified investment at the time of its acquisition if, at that time, the property which would be acquired by exercising the warrant or right would be a qualified investment for an RRSP. For example, an RRSP which purchases a call option listed on the Vancouver Stock Exchange has acquired a qualified investment if the option may be exercised to acquire a share described in subparagraph 204(e)(iv). An RRSP which purchases a put option has acquired a non-qualified investment.

It seems to me that this should fall under spirit of the legislation -- a derivative instrument that lets you acquire a qualifying instrument -- but I suppose it might fail on the basis that you have only a contingent right to do so, based on someone else's absolute right to exercise the put. Did you ever press the tax department on writing puts? Did you ever get any further with them on the issue of holding puts in an RRSP? Is there a petition I can sign? - L.R.

Unfortunately, there are too many variables to do so. Will high-tech still be hot five years from now? Will the U.S. market dominate or will the Far East come roaring back? No one can say with certainty.

That's why I have always advocated a balanced approach to investing. Build a portfolio of good quality funds with sound management and a consistent track record and aim for an average annual return of 10% - 12%. If you can manage that over the long haul, you will do very well and your investments will prosper.

The danger of trying to chase after the "hot" funds of the day is that yesterday's heroes may be tomorrow's goats. I've seen it happen more times than I care to remember. Consistency year in and year out is a much more successful formula.

For a younger person at this time, I recommend a portfolio that would be about 60% in equity funds, 30% in bond funds, and 10% in money market or short-term bond funds. As for selection, if a fund has consistently ranked in the first or second quartile of its category over the past five years, it's usually a good choice. - G.P.

I am a third year university student. I work in the summers and make enough to pay tuition in full. I do accept OSAP and Canada Student Loans also to pay for books and other expenses. I invest the rest in flexible GICs and sometimes long-term GICs.

Lately I have even begun contributing to an RRSP. I am 21. What else can I do to be secure? My GICs will have to be opened within 18 months because I will have to pay off my loan debts.

Okay - so this is my life story. I really need to know what financial tips you have for someone who will soon be in the full-time working world. What options do I have besides GICs and regular savings accounts? - S.A., Toronto

To answer your questions, RRSP contributions are a good idea because they get your money working for you in a tax-sheltered environment. However, I suggest you not claim your tax deductions until you are working full time and in a higher tax bracket. That way they will be worth more to you. You're allowed to do this.

Regarding investments, I suggest you not be overly conservative. You're young and have a long time horizon. That means you can take somewhat more risk, for potentially much greater returns.

Regular savings accounts are the worst place to hold money because they pay very low interest. GICs are somewhat better, but still very conservative.

Within your RRSP, you may wish to keep some money in GICs as a low-risk core position (say 25% of the plan). I suggest you invest the rest in mutual funds, to provide greater growth potential. To keep things simple at the outset, I recommend you put 25% into a good Canadian balanced fund, such as Altamira Growth and Income or C.I. Canadian Balanced. Put 30% into a growth-oriented Canadian equity fund, such as Synergy Momentum or Altamira Equity. Put the remaining 20% into a strong U.S. equity fund, such as BPI American Equity Value, Ethical North American or AGF U.S. Growth.

There are many other possible variations. For example, you may wish to stick with the no-load funds offered by your bank. If you check out my 2000 Buyer's Guide to Mutual Funds, you'll find many more ideas. You may also want to read my new book, Retiring Wealthy in the 21st Century.

The main point I want to make is that we're standing at the opening of an exciting new century with all kinds of possibilities and money-making opportunities. At least some of your investments should be positioned to take advantage of that. Good luck. - G.P.

The most conservative route is to put the money in a traditional three-year GIC. That way, you'll know your capital is safe and you'll get a modest rate of return of around 6%. If you want to take more risk, try a three-year index-linked GIC. If stock markets keep going up, you'll get a much better return. The worst you can do is get your principal back at the end with no profit.

I don't recommend mutual funds in your situation because of the risk of loss. - G.P.

Leaving aside cash infusions or withdrawals, the only time a plan's book value changes is if a security is bought or sold. For example, one way of increasing the foreign content limit in an RRSP is to sell a security that has had a big gain and then, if you wish, repurchasing it. To illustrate, suppose you bought $2,000 worth of units in a Canadian equity fund a few years ago. It has since doubled in value. However, the book value of those units remains at $2,000, giving you $400 worth of foreign content (20% x $2,000). If you were to sell the units and then repurchase them, the book value would go up to $4,000, doubling your related foreign content allowance to $800. But that can only happen if you trigger a sale.

Conversely, if the units had dropped in value by 50%, triggering a sale would cut the related foreign content to $200 (20% x $1,000). In this case, you'd be better off standing pat, at least from a foreign content perspective.

Note that a switch from one fund to another within the same family is deemed to be a sale and new purchase in RevCan's eyes.

You'll find a more detailed explanation of the whole concept of book value in my 2000 Buyer's Guide to RRSPs. - G.P.

Also, if you could only invest in one of these two funds (Triax New Millennium Internet Ventures Fund or Triax New Millennium Technology Trust), which one would you choose? - J.S., Trenton, Ont.

As far as the New Millennium Internet Ventures Fund is concerned, I think it's an interesting idea and there's a lengthy article about it in the December issue of the Mutual Funds Update newsletter. Here's part of it:

The fund is available through the purchase of two different types of units. One offers the capital protection feature, the other doesn't. But here's what makes the concept unique: you don't pay any more for the guarantee! In the case of segregated and protected funds, a substantial premium is charged for such guarantees in the form of a higher annual management expense ratio (MER). Not in this case.

The two types of units offered are:

Series I - Protected Shares. These provide 100% capital protection. At the end of February 2010, investors will receive no less than the original amount they put in. Of course, if the units rise in value in the meantime, you'll receive the higher return. You can redeem your units prior to the 10-year maturity date, but in that case you won't receive the full guarantee. The guarantee is achieved by investing slightly over half the assets of this section in a special CIBC stripped bond that will mature on the capital repayment date. The maturity value of the bond will be enough to cover the original money invested. Of the balance of the money subscribed, 7% will go to pay sales commissions and the balance (Triax estimates about 40% of the total) will be invested in Internet-related securities. This means that only a portion of your money will be actively at work on your behalf.

Series II - Venture Shares. These units do not carry the capital guarantee. As a result, most of the assets will be invested directly in shares of Internet and e-commerce companies. This means the capital gains potential on these shares is much greater. But if the securities perform poorly, there is no protection. The guarantee concept works especially well in labour funds because of their high risk and the long mandatory holding period. Whatever happens, you know you're locked in for at least eight years anyway (if you sell early, you have to repay your tax credits plus a deferred sales charge). So there's no option of switching out if the fund doesn't do well.

Triax calculates that if you choose the Protected Shares and only get back your capital at the end of 10 years, you'd earn the equivalent of a 3.6% annual return on the basis of your federal and provincial tax credits alone. That doesn't take into account the additional deduction you'd receive by contributing the units to an RRSP. - G.P.

Your contribution limit for the year 2000 is 18% of your 1999 earned income, to a maximum of $13,500. If you are a member of a pension plan, you have to deduct your pension adjustment (p.a.), which your employer can provide. There is a detailed explanation of how to calculate your contribution room in Gordon Pape's 2000 Buyer's Guide to RRSPs.

Alternatively, if your income in 1999 was about the same as it was in 1998, base your 2000 contribution on the amount you were allowed for the 1999 tax year. You'll find that on your 1998 notice of assessment from Revenue Canada. - G.P.

Until now, Canadian investors haven't had much choice if they wanted to invest in the Nasdaq 100 Index, which includes the top companies listed on the exchange.

That is now changing. The latest entry into the field, from CIBC, is especially interesting because it enables investors to participate in the Nasdaq 100 inside an RRSP without being limited by the 20% foreign content rule.

Buying this fund gives you a large high-tech component: Microsoft, Intel, Cisco, Amazon and the like. But you also participate in other major growth sectors of the economy such as health care (First Health Group, PacifiCare Health Systems), transportation (Northwest Airlines), communications (Reuters), and retail (Costco, Starbucks). So while the emphasis is still high tech, there is broader diversification here than you'll find in the Altamira fund or the Internet Index Trust.

Normally, I don't recommend funds that don't have a three-year track record. But there are times when an exception is warranted because of the state of the markets, as it was with the Altamira e-business Fund. Here again, we have a fund that is too new to have any meaningful track record -- over the 30 days to Nov. 5, it gained almost 10% on the strength of the Nasdaq surge but that pace is not sustainable. However, if we wait until it has compiled a three-year record we could leave some big profits on the table.

I am also reluctant to recommend volatile securities for an RRSP, and a mutual fund based on Nasdaq has to fall into that category. However, here again I'll make an exception. If you're under 50 and can handle the risk, you might want to tuck a bit of this fund into your registered plan for added growth potential. - G.P.

In short, your options are:

1) Rely on your advisor. 2) Pay for an impartial second opinion. 3) Educate yourself. - G.P.

Instead, start building a good mutual fund portfolio for yourself. That way, you'll get immediate diversification and professional management. For help in selecting the right funds for your needs, consult one of the many mutual fund guides are available, including mine. - G.P.

However, paying the DSC may be worth it if you reinvest the money in new units of the fund or another labour-sponsored fund. In that case, you can claim a new tax credit (as long as you haven't already invested the $5,000 maximum for the current year.)

The holding period for tax credit purposes was extended to eight years in 1996. If you bought units after that extension and sell them early, you'll have to repay the credits plus a deferred sales charge. Very expensive! - G.P.

(For a simple example, I put $1,000 into my RRSP and buy two funds: $800 into a Canadian fund, and $200 to a foreign fund. At some point, the foreign fund surges ahead of the Candian fund so that it is worth $300 while the Canadian drops to $700. Now 30% of my portfolio is foreign. What do I do now?) - R.B.

This a labour-sponsored venture capital fund just for British Columbia residents. The investment focus is on B.C.-based industries in the biotechnology, manufacturing, high tech, tourism and knowledge-based sectors. To be eligible, a firm must have less than $35 million in assets and be 80% located in B.C., with at least half the salaries and wages paid to B.C. employees.

The fund started slowly and returns in the early years were low because most of the assets were held in short-term notes while investment opportunities were reviewed. But recently it has been a strong performer. The fund gained 52.5% in the last six months of 1999, most of it due to a merger between one of their holdings, HotHaus Technologies of Vancouver, and Broadcom Corporation of Irvine, California in a deal valued at $414 million. Working Opportunity was a major shareholder of HotHaus and the merger generated a profit of more than $100 million for the fund and its unitholders. This is the kind of elephant deal that all venture funds look for, and which can drive up the returns dramatically overnight. The problem is, there is no way of predicting when they'll happen, so investments shouldn't be made in anticipation of another big deal any time soon. Fortunately, Working Opportunity was developing a decent track record prior to the HotHaus coup, and there's no reason to believe that progress won't continue. Decent safety record for a fund of this type. Sold by brokers and planners throughout B.C. Call 1-800-563-3863 or (604) 688-9631 for details or visit their web site (http://www.wofund.com/wof). Rating: $$$ - G.P.

I recommend you wait until after the RRSP season rush and then take the appropriate steps. By waiting until year-end, you may find yourself making hurried decisions.

If you'd like some guidance on making the conversion and deciding on your RRIF investment strategy, check out Gordon Pape's 2000 Buyer's Guide to RRIFs and LIFs. - G.P.

Depending on your province of residence, if you have a self-directed RRSP you could use "old" RRSP money to buy labour fund units up to the maximum $5,000 amount. This strategy is explained in detail in Gordon Pape's 2000 Buyer's Guide to RRSPs.

Also, you don't have to hold labour units in a registered plan. You can buy them outside the plan and claim a tax credit. Later, when you have more RRSP room, you can contribute them to the plan using what is known as a "contribution in kind". - G.P.

I know there is the federal RESP program but can this be a parent-administered program, can I hold mutual funds and/or stocks in it? - W.B., Whitehorse

As for RESPs, you can indeed set up self-directed plans that allow you to invest in a variety of securities. Your broker should have one - most do. With the RESP, you also qualify for a federal government grant. You'll find more information on these topics in my book Head Start. - G.P.

Re: good S&T funds, there are many. Those that receive a $$$ (above-average) rating in the On-Line Mutual Fund Database include:

AIM Global Technology Altamira Science and Technology CI Global Technology CIBC Global Technology Green Line Science and Technology Talvest Global Science and Technology

- G.P.

If you're interested in a labour-sponsored venture capital fund, First Ontario would qualify. - G.P.

The car loan muddies the waters a bit - it would have been better to finance it separately. However, if you can show evidence of the amount of the total loan attributed to each, and that you are paying down both the car loan and the investment loan in proportion, that will probably be okay (I say probably because you can never be totally sure on these points).

You cannot claim interest charges for previous years in the current tax year. But you can go back and amend your return for previous years by using form T1-ADJ. Check the Tax Guide for information about how to do that. - G.P.

Here is the latest review of the fund, as contained in our On-Line Mutual Funds Database. Details on how to subscribe to the Database can be found elsewhere on this Web site.

From Gordon Pape's On-Line Mutual Fund Database:

Industrial Growth Fund Rating: $ Finally! After years of waiting, the resource sector showed some signs of life in ‘99 and this fund, always overloaded with resource stocks, made a little money for its long-suffering investors. Gain for the year to Dec. 31/99 was 13.1%. However, that was way below average for the Canadian Equity category. Long-term results remain well below par (three year numbers show an average annual loss of 3.5%) and the historic risk profile of this fund is woeful — one of the worst in the category according to figures compiled by Wilfred Vos of TAL Fund Management. In fact, there's a 5% chance you could be in the red even after a five-year hold. Manager Alex Christ is one of the founders of Mackenzie Financial. He is a legend in the mutual fund business and one of the true pioneers of the hugely successful Canadian fund industry. At one time, he was a brilliant manager — Industrial Growth was one of the great funds of the ‘80s. But this fund has been an underachiever for some time and, even after its '99 gain, cannot be recommended. - G.P.

ING Life CAN-DAQ 100 Fund $$$ There are not many funds in Canada that offer investors a play on the red-hot Nasdaq exchange. This was one of the first to do so, and it recently passed its third anniversary. This is an index fund that tracks the Nasdaq 100, an index that consists mainly, but not exclusively, of technology issues such as Microsoft, Intel, and Dell. There are other types of companies represented as well, however, including retailers like Starbucks and transportation firms such as Northwest Airlines. Given that Nasdaq has been going crazy in recent years, it should come as no surprise that this fund has produced spectacular results: 46%, 62%, and 85% for three, two, and one year returns to Nov. 30/99. The fund is structured in such a way so as to make it fully eligible for registered plans. However, before you put it into your RRSP, think about the potential for high volatility here. Yes, the gains have been terrific. But if the Nasdaq balloon ever deflates, the losses could be severe. If you're going to add it to your plan, we recommend that it not be as a core U.S. holding. Choose a more broadly-based fund for that purpose and use this as an add-on. This fund will start off with a $$$ rating. - G.P.

As a general rule, it's a good idea to use tax-advantaged securities in non-registered accounts. Keep the bonds and other interest-bearing securities in the RRIF and use preferred shares, royalty trusts, etc. in your taxable accounts. So what you're proposing looks like a good idea.

However, you need to take a close look at your total income picture before you make a move. You tell us you're drawing $30,000 annually from the RRIF. You don't say anything about other sources of income: CPP, OAS, revenue from your taxable portfolio, etc.

Remember that if your net income exceeds $53,215, the government will start clawing back your Old Age Security payments. What many people don't realize is that net income includes the taxable amount of dividends you received - not the actual amount. This is the trap I referred to.

Suppose you are receiviing $10,000 a year in interest income from your taxable portfolio now. You carry out your plan and switch the bonds to preferred shares. For simplicity, we'll say you now get $10,000 in dividend income instead.

There's a complicated process for calculating the dividend tax credit that involves "grossing up" the amount of dividends you received by multiplying by 125%. So the taxable amount (which will be included in your net income) is actually $12,500 - even though you only received $10,000.

That might be enough to push you into clawback territory. You'll have to calculate whether the savings you obtain by switching the interest income to dividend income will be more than enough to offset that.

It certainly would be nice if they'd make the tax system a little easier! - G.P.

If, for example, I withdraw some or all of that overcontribution, will RevCan consider that a taxable withdrawal, or will they see that I have $6,500 in my RRSP account that isn't really eligible, since I haven't claimed it as a contribution. - C.L.

Under the law, the excess contribution will attract a penalty of 1% a month until it is withdrawn. I suggest the best way around this problem is to immediately contact the company that administers your RRSP, explain the situation, and arrange to pull out the excess amount before month-end. It will take some paperwork, but they should be able to handle that for you with incurring any tax liability. - G.P.

However, he should not claim the total deduction immediately, since his income is relatively modest. He can spread the claim over as many years as he wants. The best strategy is to claim just enough each year to reduce his taxable income to the lowest bracket, and carry the balance forward. There is no time limit on this.

One other point. You don't say whether you have an RRSP, pension, or even if you're working. Depending on your family situation, it may be worthwhile directing some of this money to a spousal RRSP. - G.P.

There are some rather complicated strategies you can consider if you're determined to beat Revenue Canada. For example, you could borrow money to set up a non-registered investment account and use the interest deduction to offset the RRIF revenue. But this involves going to a lot of trouble (and a degree of risk) to avoid paying taxes on $7,000. If I were you, I'd be happy to have enough retirement income to put you in a higher tax bracket and enjoy your life. - G.P.

My question is, should I put more money into my Canadian equity fund today (of course having maximized my foreign content), or should I speculate over the next five months and hope for the fund price to go down? - C.B.

There are several very good socially responsible funds around, but you have to be selective. Among Canadian equity funds, our top recommendation is the Investors Summa Fund, which has been an outstanding performer over many years. For a U.S. equity fund, we like Ethical North American Growth Fund, which has a fine record, an excellent managerial team, and low volatility. Among fixed-income funds, Ethical Income Fund gets a $$$ rating in our On-line Mutual Funds Database, although all bond funds are struggling right now. For a labour-sponsored fund, try the First Ontario Fund, which applies socially-responsible standards.

Reviews and ratings of all these fund plus others in the socially responsible category can be found in the On-line Database or Gordon Pape's 2000 Buyer's Guide to Mutual Funds. - G.P.

Using these funds, you could indeed have 100% foreign content in your RRSP quite legally, instead of the 25% allowed by law as a result of the recent federal budget. The question is, do you really want to do that? So far in 2000, the TSE 300 has outperformed most of the world's leading stock indexes. If you fill your RRSP with foreign content, you would not be participating in that.

Each portfolio has to be structured to reflect the objectives of the investor. However, we can think of very few cases where we would recommend 100% foreign content. Most financial advisors would suggest keeping foreign content to the 40% - 60% range and investing the rest in Canada. - G.P.

You may find some problems making an investment if you are dealing with a relatively inexperienced person, which is exactly what happened to my daughter recently. In that case, ask to speak to someone more senior in the organization.

If you're buying labour funds for an RRSP, it's a good idea to hold them in a self-directed plan since you can obtain extra foreign content room in that way. The formula is $3 in additional foreign content for every $1 invested, to a maximum of 45% of the book value of your plan. - G.P.

So it appears that European markets are strong at this stage and a good European fund in a portfolio makes sense. Assuming a well-balanced portfolio, it should not account for more than about 10% of total assets. - G.P.

Without asking for personal advice, what would you personally do if you were in this situation? Is your advice for Trimark unitholders the same as in the June ‘99 MFU? Has your advice for the small cap funds, especially the Enterprise fund, changed ? Do you have an updated opinion on which of Trimark's funds is likely to perform the best in 2000 ? - F.H., Kingston ON

This fund invests in leading international companies "whose technology, inventiveness or entrepreneurship gives them a competitive advantage in the marketplace". What that boils down to is that manager Rick Sarafini combs the world, but especially the U.S. (almost 80% of the assets), looking for mainly for top-quality high-tech stocks. This has been by far the strongest performer in the Trimark stable lately, with a terrific one-year gain of 175% to Feb. 29/00. That was well above average for the Science and Technology category, where this fund is slotted. The safety factor has been relatively good so far for a fund of this type. We're boosting the rating to $$$ on the strength of this strong performance.

The Enterprise Fund has posted good numbers so far but we have not done an analysis of it because it isn't even a year old yet.

We'll feature a comprehensive review of the Trimark family in an upcoming issue of MFU. - G.P.

1) The tax credits they provide. Everyone gets a federal credit worth 15% of the investment, up to a maximum credit of $750 annually. Several provinces offer provincial credits as well. However, note that to claim a credit for the 1999 tax year, your purchase had to be made before Feb. 29.

2) Increased foreign content. You are allowed $3 in extra RRSP foreign content for every $1 you invest in these funds. So if you put in $5,000, it gives you $15,000 in additional foreign content room. However, you cannot exceed 45% foreign content in your plan in this way.

3) Improved returns. Many of these funds have produced some excellent gains recently, thanks to investments made several years ago in high-tech companies that have prospered.

Your financial planner should be able to provide you with any labour funds that are offered for sale in your province. - G.P.

Your younger age does come into play, however, if the assets are moved to a RRIF. The minimum annual withdrawal can be based on the age of a younger spouse. This means that less money can be taken out of the RRIF each year, if desired, reducing the tax liability.

To illustrate, let's assume your husband is age 70 in the first year he has to make a RRIF withdrawal, and that the plan is worth $250,000. Under the minimum withdrawal formula, he must take out 5% of the value of the plan (in this case $12,500) and declare it as income in the year it's received.

But let's say that he chooses to base the minimum annual withdrawal on your age when the RRIF is set up (which is when the election must be made). We'll assume you are 50 that same year. Using the formula, the minimum withdrawal is now only 2.5% of the plan's value, or $6,250. His tax exposure is significantly reduced.

This advantage will continue for the life of the RRIF. And, of course, you can always withdraw more than the minimum if the money is needed. - G.P.

However, you will need to review your contract with the insurance company to see if you have the ability to do this. You should contact your agent and discuss the matter with him or her. Of course, the agent will try to discourage you from moving but you have to cut through that and insist on knowing if the contract allows you to do so if you wish. If so, find out if there are any penalties involved before making a decision. - G.P.

When I received my financial statement from London Life there was no indication that I had any further activity from my original purchase, in other words no record of anything added to my portfolio. Why should I be paying income tax when there is no apparent benefit? - A.F., Toronto

If the seg funds are in a non-registered account, then the T3 slips are showing results of activity within the fund's portfolio that have taxable implications for you. Many fund investors don't realize that when assets such as stocks within a portfolio are bought and sold during the year, the capital gains and losses than are incurred by the manager are actually the responsibility of the individual unit holders for tax purposes, since the funds are trusts. At year-end, all these transactions are taken into account and T3s are issued if required.

This can be very frustrating, especially if the fund has performed poorly during the year - in some cases you can end up paying tax even though a fund's net asset value has declined. Often, however, if there are taxable activities there are also distributions. See if you received any, either as cash or additional units.

In any event, if your account is non-registered you must declare the amounts on your T3 slips when you file your return. - G.P.

Keep in mind, that you will be taxed on the money when it comes out of the RRSP and a portion will be withheld at source for this purpose. - G.P.

He turned 70 on Feb. 28, 2000. He is still employed at Canada Post. Hopefully he will retire soon. He contributed to Canada Pension until his 70th birthday. He has not yet started to received any benefits. My questions:

1) Did he have to contribute from age 65-70 in order to receive the maximum 30% increase, totaling 130% benefits? In other words, would he still receive the 130% if he had not contributed from age 65-70? (We are told this 30% increase is for those who choose not to draw any benefits until age 70).

2) If he did not have to contribute in order to receive the maximum 30% increase, can he receive a refund?

3) He was told he could receive one year back benefits now. If so, can this be split with his wife?

4) If he can get the one year back benefits, can he claim this for year 1999 for tax purposes, even though he would receive it in the year 2000? - H.M.

1) Anyone who continues to work past 65 must keep making CPP contributions, up to age 70. Ironically, had he stopped work at 65 but waited until 70 to collect, he still would have received the 30% bonus without making the additional contributions.

2) Doesn't apply - he did have to contribute.

3) There is a formula for splitting CPP income with a spouse. It's somewhat complicated. You can look up the details at the Human Resources Development Canada Web site: http://www.hrdc-drhc.gc.ca/isp/cpp/

4) Normally, you declare income in the year it is received. Plus the tax rates in 2000 are lower so I don't know what benefit there would be declaring it in 1999. However, you may want to talk to a tax advisor about this question. - G.P.

When he makes the conversion, he can choose to use your age to determine the amount of the minimum annual withdrawal. Since you say you don't need the money, this would make sense in your case, since the less that comes out of the plan, the lower your tax liability.

Here's how it works. Your husband will be 69 on Jan. 1, 2001. Let's use your figures and say the RRIF is worth $140,000 at that time. Until age 71, the formula for calculating the minimum withdrawal is the value of the RRIF on Jan. 1 divided by 90 minus your age (or the age of a younger spouse) on Jan. 1.

If your husband uses his age, the minimum withdrawal in 2001 will be $140,000 divided by 21, or $6,666.67.

However, let's assume you will still be 66 next Jan. 1. In that case, if your age is used, the minimum withdrawal will be $140,000 divided by 24, or $5,833.33. Of course, you can take more any time you wish.

The younger spouse election must be made at the time the RRIF is opened. - G.P.

Lamarche is a veteran fund manager who was with Altamira at one time. He brings a more disciplined style to these two small-cap funds than Buckland who, by his own admission, ran them more or less in his spare time. Lamarche took over in August 1999 and both funds have done well in the first year under his direction. Multiple Opportunities had a one-year gain of 32.3% to Aug. 31, while Special Opportunities was ahead 65.7%. - G.P.

If she draws $20,000 a year from the RRSP as you suggest, you will lose the small spousal tax credit and she will have to pay tax on most of the money taken out. If the remainder (which will be substantially less than $20,000 after taxes) is then re-invested in a non-registered portfolio, all the income earned will be taxable.

Since you don't need the money, it makes much more sense to leave matters as they are and let the RRSP assets continue to grow tax-sheltered for as long as possible. When your wife turns 65, transfer enough money to a small RRIF to generate $1,000 a year in additional income. This can be sheltered under the pension tax credit. - G.P.

This means that the only way to get the money from your plan into hers would be to withdraw it from your RRSP and pay the tax, since it would be treated as income. Then, if you or she has enough RRSP contribution room available, the money could be moved into a personal plan for your wife or a spousal plan. Of course, in the process you lose whatever contribution room you had available for new money.

Frankly, this doesn't make any sense. If there is contribution room available, use it to put new money into your wife's spousal plan and don't contribute any more to yours. So you'll end up with more money than you know what to do with in retirement. There are worse fates.

Incidentally, there is a lesson here for anyone working in a job that has a good pension plan (public servants, teachers, auto workers, etc.). Don't let this happen to you! Set up a spousal plan early. - G.P.

You are also allowed an additional rollover of $1,500 a year for each year you were with the employer up to and including 1988, and did not participate in a company pension plan.

For more details, see the chapter titled Rollovers in Gordon Pape's 2000 Buyer's Guide to RRSPs. - G.P.

1. How do I buy it? 2. What are the fees? 3. What is the minimum I can buy? 4. How would I know when I should sell? 5. Is this a good time to buy or should I wait til it drops? - A.P.

That said, here are the answers to your questions.

1. The AIM funds can be purchased through any registered representative (broker, planner, etc.), or through discount brokers.

2. All the AIM funds carry an optional front or back-end load. Front-end charges are negotiable. There is also a "low-load" purchase option with a maximum 2% redemption fee which is normally made available only to institutional buyers, so you may not be told about it. Ask.

3. Minimum initial investment is $500.

4. If you buy a technology fund, you should have a time horizon of at least three years. As a general rule, you should not be trading in and out of mutual funds.

5. There is no way of knowing when the "right" time to buy is. If you are concerned about further declines, use a dollar-cost averaging approach and spread your investment over several months. - G.P.

My philosophy has been to accelerate payment on the highest interest loans. My wife put some money into RRSPs this year and, together with your Q&A archives, I believe I need to rethink my approach.

Our total debt is relatively small ($15,000ish). The advantage we currently have is that we have plenty of flexibility with payments - I can easily put down whatever extra money I have towards the loan. This works for us because it is convenient and we do put away what we can.

Should we be looking at finding a financial advisor to determine the best payment plan? - M.Z.

At an average annual rate of return of 10% (well below your current 13% return), your present RRSP will be worth about $215,000 in 20 years, even if you never contribute another cent. If you start again from zero contributing, say, $2,000 a year (remember, you still have the rest of your mortgage to pay off), the plan will be worth about $115,000 after 20 years at 10%. I don't like the math. - G.P.

I suggest that you ask the representative to recommend a specific portfolio for you. Then, when he/she has done that, ask for historic rates of return for that portfolio and compare the results to an appropriate benchmark (perhaps the average Canadian balanced fund). Make sure the comparison is on an apples to apples basis, that is net of all fees. (Keep in mind that your wrap account fees may cover most of the MER expenses usually associated with mutual funds.)

I would not recommend immediately shifting all assets into one of these accounts. If you are interested, set up a small portfolio and track the results for a couple of years, comparing the returns to your other investments. If you're satisfied the wrap account is doing well, you can then shift over more money. - G.P.

In your father's case, the only way to reduce tax would be to re-structure the portfolio to move some or all of the assets out of interest-bearing securities like GICs and CSBs. Interest is taxed at the highest marginal rate, so your dad gets no tax breaks.

Alternatives would be preferred shares (dividends are eligible for the dividend tax credit), real estate investment trusts and royalty income trusts. A financial advisor can provide specific recommendations. - G.P.

The cons are: -Once the RRSP is cashed in, the capital gains will be taxed at the regular higher rate, not the lower capital gains tax rate. -The MER for the clone funds is about .5% higher than the regular version.

Considering the pros and cons, is it really better to have this money in an RRSP? Has the higher taxation rate been factored in by those that are promoting capital gains generating investments in RRSPs? - J. S.G.

Consider this math. You have $10,000 to invest. You can put it into an equity mutual fund inside an RRSP, or invest the money outside. Your marginal tax rate is 40%. In both cases, the investment doubles in value.

If you invest outside the RRSP, you'll pay tax on 2/3 of the $10,000 capital gain. You'll end up with a tax bill of $2,667.

If you invest inside the RRSP, you'll pay no tax on the capital gain. But you will pay tax on the full $20,000 (original investment plus profit) when it is withdrawn. Tax bill: $8,000. However, you will have received a $4,000 refund when you made your original contribution. That reduces your net tax bill to $4,000.

You still appear to be better off investing outside the RRSP, but there's one more factor to consider. What did you do with the $4,000 tax refund you received? If you re-invested this money outside the RRSP, using the same assumptions, you would have generated an additional capital gain of $4,000 in your non-registered plan. After tax, you would have been left with $2,933 profit.

So to sum up: Original investment outside the RRSP nets you $17,333 - principal and after-tax profit.

Original investment inside the RRSP, with the refund reinvested, nets you $18,933, after tax, once the money is withdrawn from the plan.

The RRSP is the better route - if you have the self-discipline to reinvest the refund. - G.P.

I do not know whether I should go to a discount broker or try to get better investment advice. How do I find better advice? I have the impression that most experienced and good brokers are not interested unless you have a significant amount to invest. - A.M.

Contributions you can deduct for 1999

For 1999, you can deduct contributions you made to your RRSPs from January 1, 1991 to February 29, 2000. You can deduct these contributions if you did not deduct them for any other year, and if they are not more than your RRSP deduction limit for 1999. Even if you can no longer contribute to your RRSPs in 1999 because of your age, you can deduct, up to your RRSP deduction limit, the contributions made in a previous year while your age permitted.

Hope this helps. - G.P.

For example, suppose your mortgage interest rate is 8% and your marginal tax rate is 40%. You would have to generate a before-tax return of 13.3% on your investments (assuming interest income) to match the 8% you save on the mortgage. If your marginal rate is 30% (assume income mainly from dividends and capital gains), you need a before-tax return of 11.4%.

Also, keep in mind that the return on the mortgage pay-down is guaranteed. The return on most investments is not. - G.P.

The maximum amount for LIF withdrawals is set by your provincial government. For a 60-year-old in Ontario, it is 6.85367% of the value of the plan on Jan. 1. - G.P.

The deal actually puts a value of $27 on each Trimark share, but the price will never reach that level because this isn't a straight cash offer. Instead, it's a combination of AMVESCAP shares and subordinated debentures, with only a small cash payment involved. Still, it represents good news to holders of the beleaguered AIC Advantage Fund, which shows a one-year loss of 5.9% to April 30 (Advantage II is down 6.7%). If you look at the shorter term numbers, you'll see the impact of the Trimark deal. Over the three months to the end of April, the Advantage Fund is ahead 16.1% and Advantage II is up 15.6% (Advantage II has a higher MER which accounts for part of the difference).

However, that represents just about all the bump AIC is going to get from Trimark. There are no significant implications going forward. The fund managers will have to decide whether they want to tender their Trimark shares for the package, or simply sell them into the market. If they sell, they'll have to find a new home for what will be a big whack of cash. - G.P.

For example, how would you feel if you had made such a move just before the stock markets tumbled in April? Could you accept the losses? The danger is that some people will panic, sell, and lock in the loss, leaving themselves with a large debt.

You say you will invest in "medium to low risk assets". You don't say what these are, but you have to assume some degree of risk if the strategy has any hope of paying off. Remember, although the interest on the loan is tax deductible, you're still on the hook for part of it, plus you'll have to pay tax on the profits if you're investing outside a registered plan.

Our advice is to think this idea through very carefully and talk it over with your spouse. Be sure you understand all the risks involved before proceeding. - G.P.

The largest Canadian stock fund that uses a value approach (which simply means buying stocks that are deemed by the manager to be underpriced) is Ivy Canadian, managed by Jerry Javasky. It went nowhere for over a year but in April it jumped 4.8%. Another value fund we like, and have recommended in the Mutual Funds Update newsletter, is Synergy Canadian Value Class, managed by Suzann Pennington. She selects her stocks on the basis of good, old-fashioned value analysis, studying such indicators as price/earnings ratios and balance sheets.

Other popular value funds are the Harbour Fund from C.I. and the Spectrum United Canadian Investment Fund. You may wish to talk to a financial advisor to determine which fund best suits your needs. - G.P.

Universal life essentially is made up of two components: an insurance component and an investing component. As a result, premiums are higher than you would pay for a comparable term insurance policy, which is pure life insurance.

At your age, you may not feel you need the investing component offered by universal life because of all your other assets. However, you might want to have some additional insurance to protect the your estate from the potentially heavy tax bill that will result when the last spouse dies.

If this is important to you, then you should discuss the options available with your insurance agent. - G.P.

But you have to analyze the portfolio to see why they did so well. As of the end of April, almost half of this fund's assets were in the technology and telecommunications sectors. Since those were the sectors that were so hot up until the April correction, it's not surprising that this fund ran away and hid from everyone else.

But look at what happened in May. The fund dropped 4.7% in value, as tech stocks weakened. That wasn't a disaster, but it was one of the weakest performances in the category - in fact, only two other funds did worse.

By contrast, of the three funds you mention, Dynamic and Fidelity had small losses of about 1% during May while the Altamira fund gained 1.4%. They each have a somewhat different style and asset mix.

This doesn't necessarily mean the AIM fund is about to go into eclipse. But we may be seeing a change in market direction here. In such circumstances, the wise investor will hold his positions until a clear pattern is established. - G.P.

You may have taken all this into account, but I raise the issue just in case you haven't done a forward projection. The desire to leave a sizeable estate to your daughter is commendable, as long as your wife's income won't be compromised when she may need it most. - GP

$10,000.00 x 66.67%= $6,667.00 x 37.5%= $2,500.00

This works out 1/4 of the value of the shares if I were to sell them. I suppose it's some moronic bureaucrat who gets paid big bucks by the government to think up this sort of thing. Why not just say the capital gains tax will be 1/4 of the value of the profit on the shares? - D.B., Calgary

$10,000.00 x 66.67%= $6,667.00 x 45%= $3,000.15

If you were in the lowest bracket, with a marginal rate of say 25%, the result would be:

$10,000.00 x 66.67%= $6,667.00 x 25%= $1,666.75

So yes, there is some method to the apparent madness. G.P.

I suggest you ask your RBC Dominion rep to have his or her assistant follow up with the government on this and to keep you posted on the status until the money is deposited. Don't be afraid to be a bit pushy. You've waited more than long enough and foregone the investment gains the money might have earned during that period. - G.P.

First, tax rates are coming down in Canada. Therefore, even though your wife is in the lowest tax bracket today, it is entirely possible that the rate at which the money is taxed when it eventually comes out of the RRSP will be lower.

Second, you will lose the tax-sheltered compounding within the RRSP. Assuming retirement at age 65, this amounts to almost 20 years worth, which is significant.

If you do decide to invest outside the RRSP, do so in the most tax-effective way possible. The number one choice would be to pay down your mortgage, if you still have one. Beyond that, choose securities that come with a tax advantage, such as dividend-paying stocks, royalty trusts, etc. - G.P.

Assuming retirement at age 55, a total of $880,000 in the RRSP, and an average annual return of 8% in a RRIF, you could withdraw a flat amount of $72,503 a year and not exhaust the plan until you turn 100. That's well in excess of what you say you need. If we lower the expected average annual return to 6%, the annual flat income to age 100 drops to $56,685. That's still above what you believe you require.

I then plugged in an RRSP value of $600,000 at age 55, combined with an 8% annual return within a RRIF. Annual withdrawals to age 100 would be $49,434 -- almost exactly on your target. So to answer your question, you would need slightly more than $500,000 in the plan at age 55 to achieve your $50,000 a year withdrawal target, as long as you can generate the 8% annual return.

But, and it's a big but, this does not allow for the impact of even modest inflation. You could be retired a long time. If you life to age 100, it would be 45 years. Let's say you live until age 85 and that inflation averages 2% a year over that time. To retain the same purchasing power that $50,000 a year had at age 55, your income at age 85 would need to rise to $86,000. Be sure you take this into account in all your calculations.

You'll find a lot more on this subject in my book Retiring Wealthy in the 21st Century. - G.P.

Also my mother has her RRSP and other monies in the RBC Dominion Securities Sovereign Investment Program. The brochure for the funds says this is a Frank Russell company. You don't mention anything about this company in your mutual fund books. I have looked at her returns and found them to be very poor. I have tried to have her look at the Bissett funds or the Philips, Hager & North funds as I believe she could substantially increase her returns and keep her level of safety in her money. Do have any information on the Frank Russell company? All I have are brochures which glorify their company and don't discuss returns. But with the returns I've seen, I can see why!! - B. M.

The Frank Russell organization is not a money management firm as such. It works with organizations such as RBC Dominion to select and monitor managers for the various portfolios in wrap accounts such as Sovereign. Typically, investors in these programs have a wide range of funds and managers from which to choose. If your mother is experiencing poor performance, she should talk to her RBC Dominion representative and ascertain why. It may be that her asset mix is heavily weighted towards fixed income securities (which have had a poor year). Or perhaps assets should be switched from one portfolio to another. She should explore the options thoroughly before going to the inconvenience of switching all her money elsewhere. - G.P.

For a dividend fund to fall into the fixed income category, it would have to own a portfolio made up in large part of preferred shares. These would provide high income and relative portfolio stability -- preferred shares behave much like bonds in the marketplace.

There are only a few funds that fall into this category. They include the Signature Dividend Income Fund from C.I. (formerly the BPI Dividend Income Fund) and the Spectrum United Dividend Fund. - G.P.

1) Talk to friends and relatives. Ask if they use an advisor. If so, do they recommend the person, and how strongly. This should be your primary source.

2) If this course doesn't prove fruitful, check out the Web site of the Canadian Association of Financial Planners (www.cafp.org). They have a facility that provides you with the names of their members in your area who meet your criteria in terms of fields of expertise, method of payment, etc. Arrange interviews with three or four of them. At the interviews, discuss your portfolio and your needs, ask what services they would provide, ask about their investment approach, discuss their fees, and see if you are on the same wavelength with the person. Then ask them to send a written proposal for your consideration, including client references. Check out the references, evaluate the responses you get, and make your decision. - G.P.

1. The income, gains and losses earned from the time the contract was established to the end of the most recently completed fiscal year.

2. The income, gains and losses earned in the immediately previous fiscal year.

3. Six percent of the fair market value in the year the contract was established and in the fiscal year immediately following its establishment.

I want to maximize the amount of money I can withdraw from the LRIF each year, using option #2. However, this means that if you have a bad year investing, the maximum amount that can be withdrawn can be rather small. Do you have any thoughts on how to invest these LRIF funds so that there would be some consistency in the pension amount that would be available each year? I have tried bonds thinking that I needed to be conservative and protect the principal but that doesn't give me the income I want in the following year. I recently switched to equity mutual funds (heavily into clone funds for foreign content) but the last couple of months has shown that to be the wrong answer as well. - J.S.

Since the withdrawal allowed is based on the plan's market value, a security that provides steady income flow isn't enough. Your bonds didn't do the job because they declined in market price in a rising interest rate environment. Stocks or equity mutual funds will of course be subject to volatility - one year your maximum withdrawal may be very high, the next it may be low. Not what you want.

Your first step is to decide what level of return is acceptable to you within the LRIF. 6% annually? 7%? 8%. You have to set some kind of target. From there, the selection process becomes a little easier.

At 6%, you can find GICs that will do the job for you.

At 7%, you may find some preferred shares that come close. There's some market risk, but not a lot. Holding a mortgage in the plan you also give you this kind of yield without undue risk, if it is allowed by your administrator.

At 8%, you're getting into higher risk territory. Some corporate bonds offer coupons at that level, but the market price will suffer if interest rates rise. The main thing to keep in mind regarding bonds is that we may be approaching the end of this current upward cycle in rates. If rates turn and start to move down, the combination of coupon plus capital gain could easily give you 8%, even on Canadas.

Beyond an 8% target, you really cannot hope to achieve those twin goals. You have to prioritize.

One other comment. You have switched from a bond strategy to a stock strategy and state that neither works. The fact is, you didn't give either enough time. In fact, it looks like you made the switch at exactly the wrong time. Keep in mind that the average Canadian bond fund returned 8.9% a year over the past decade and 6.7% over the past five years - but only 1% over the 12 months to May 31. In other words, this was a bad time for bonds and doesn't really tell you whether the bond strategy would work over the long haul. - G.P.

That said, Canada Trust is now part of TD Bank. Therefore, you might want to consider setting up a self-directed RRSP with TD Waterhouse (which would effectively keep all your assets within the same institution) and use that for part of your RRSP money to provide diversification by adding third party funds. The last time I checked, TD Waterhouse was offering PH&N funds along with many other no-load alternatives, so you could have your cake and eat it too. - G.P.

I realize that there's always a balance between putting money away and going on a great holiday every few years, which we haven't done for a while. But I feel that I could stop contributing to my RRSP and just let the principal grow until I retire. If I keep saving at my current rate, I could potentially have $2,000,000 in my RRSP at age 55. That way, we may be able to take the money that I annually contribute to an RRSP and put it towards a nice holiday every few years, which my wife would love. - D.D.

Also, some people who retire before 69 prefer the steady cash flow they can arrange from a RRIF to making periodic withdrawals from an RRSP.

Up to age 71, the formula for calculating the minimum annual RRIF withdrawal is the market value of the assets in the plan on Jan. 1 divided by 90 minus your age on Jan. 1. If you subtract 65 from 90, you get 25. That's where the 4% comes from (1/25 of 100).

If you convert to a RRIF at age 69, the minimum withdrawal in the first year will be 4.76% of the plan's market value. - G.P.

Whether building your own stock portfolio is a better idea than investing in a mutual fund depends mainly on two things:

1) Your stock-picking ability (or that of your financial advisor).

2) The amount of investable cash at your disposal.

A properly diversified stock portfolio should consist of at least 8-10 stocks and preferably 15-20. It should cover all the main sectors of the market (e.g. technology, communications, financial services, industrials). The weighting of each stock should be carefully considered, so that the portfolio doesn't become overly skewed towards one or two issues. Also, you need to decide what approach you want to take. Do you want a portfolio that will minimize risk, or one that will offer the potential for greater returns but with more risk attached? These are the sort of decisions that a fund manager makes on your behalf.

To set up a properly-diversified stock portfolio, you should have at least $10,000 available to invest. You can buy into many mutual funds for as little as $500.

As for avoiding the costs of buying mutual fund units, don't lose sight of the fact you will have to pay sales commissions on all trades within your stock portfolio.

Lots to think about. - G.P.

However, there was a period some years ago when it was possible for a family to declare two principal residences, one for the wife and one for the husband. It's possible you may be entitled to some relief under that, but you will need to consult a tax expert who has a thorough knowledge of all the details to find out if these rules apply in your case. - G.P.

Background: She expects to net about $300,000 from the sale of her house, has a monthly income of $2,200 and an annual RRIF 'withdrawal' of about $4,000. Condos and apartments for sale in the area that she is interested in living are in the $300,000 range. Suitable rental units run about $1,300 - $1,400/month. She is in excellent health!

My bias: Renting would be more expensive on a monthly basis, but would avoid the property transfer tax -- an estimated $3,500, and many other costs associated with the purchase of a 'new' home. The investment would also generate additional income (but unfortunately more taxes) to help offset the cost of renting. - B.L.

1) Rent must be paid out of after-tax income. So you should calculate how much income your mother actually needs to receive in order to meet rental payments of, say, $1,400 a month. If her marginal tax rate is 25%, she will need $1,867 in before-tax income to pay it.

2) Investing the money and renting carries a degree of risk, unless it is placed in ultra-safe securities such as GICs. You can currently get about 6% on a five-year GIC. That would produce $18,000 a year ($1,500 a month) in before-tax income, or $13,500 after tax (assuming a 25% bracket.)

3) If the area is a desirable one, the value of a condo may increase and since it would be a principal residence, the gain would be tax-free.

In short, you need to add up all the financial pluses and minuses and then ask one more important question. Would you mother feel more comfortable in rented accommodation or in a home of her own? - G.P.

You are quite specific as to when you want to buy the house - June 2001. You want me to recommend mutual funds that will kick out a good return for you between now and then, however you say you don't want to take higher risks.

This is an impossible task. No one can time the markets in the way you are requesting. And high returns are directly related to above-average risk. The two go together like love and marriage.

If you want to be sure that your capital will remain intact and provide a modest gain for you over the next year in the 4% - 5% range, put it into T-bills, a one-year GIC or a money market fund. Anything else will expose you to risk.

Suppose you invest in equity funds and the stock market is down 25% next June? It can happen. What's your priority? Do you want to roll the dice on a higher return and run the risk of losing some of your savings? Or do you want to be sure the money will be intact when you need it? You can't have it both ways. - G.P.

Of course, in assessing the return you also have to look at the risk. If one of the instructions you gave to the advisor was to minimize risk and preserve capital, then your money should have been invested in conservative funds which, by nature, have a lower return potential. It's all a question of trade-offs.

But, bottom line, if you can reap a 10% annual return over the long haul, you should be quite satisfied. - G.P.

For example, a young retiree (someone in their 50s) should consider holding up to half of the RRIF in a selection of carefully selected, low-risk stocks and/or equity funds. A systematic withdrawal plan can be used if desired to generate revenue from this part of the RRIF. As you grow older, the percentage of equities should gradually decrease. By the time a person reaches their 80s, the percentage of stocks may be down to near zero and serious consideration should be given to using part or all of the balance of the RRIF to buy a life annuity to ensure that you don't outlive your income.

As far as an RRSP is concerned, as a general rule the younger you are, the higher the percentage that can be invested in equities. I always believe in some balance, however, and bonds do have profit potential of their own so I recommend not exceeding 70% equities in an RRSP. - G.P.

The question that I wanted to answer is which are the funds with the highest dividend yields. I can't see any way that your book helps answer that question without at least skimming every page. Your old format would have at least pointed me in the right direction quickly.

I hope you will return to the old format where you consider funds in a sector rather than listing them by fund company. - H.C., London, ON

However, if you consult the section at the back titled Best Funds at a Glance, it will narrow down your search. All the $$$$ and $$$ rated Canadian equity funds are grouped together there, including the dividend funds, so you can quickly pick out the top-rated performers and refer to the full review under the appropriate company.

Also, every March we publish a complete analysis of dividend funds in my Mutual Funds Update newsletter, with special attention to tax-advantaged cash flow. Top performers in 1999 included BPI Dividend (now Signature Dividend), Dynamic Dividend, Canada Trust Dividend Income, Strategic Value Dividend and Talvest Dividend. If you're prepared to accept the additional risk associated with a high income fund to achieve greater cash flow, look at AIM Canada Income, Atlas Canadian Income Trust, BPI High Income, Bissett Income Trust, Guardian Monthly High Income and Saxon High Income.

Hope this is of some help. - G.P.

Second, select a plan that offers as much flexibility as possible, thus allowing yourself the ability to properly diversify.

Third, take a long-term view. Your newborn will not need to tap into the assets of the RESP for at least 18 years. That means there is plenty of time to ride out ups and downs of the stock markets.

Fourth, adopt a strategy and stick to it. I suggest that when the child is young, your focus should be on equity mutual funds for maximum growth. As your youngster gets closer to university age, start moving some of those assets into conservative fixed-income securities like GICs to ensure that the money in the plan won't be compromised by a sudden plunge in the stock market just before he or she is about to start college.

For more complete details on RESP investing and the strategies to use, get a copy of my book Head Start. It's available through the Bookstore on this Web site. - G.P.

For example, let's assume you purchase $100,000 worth of 10-year bonds with a coupon rate of 6%. This means you would receive $6,000 of income for each of ten years, and then get your $100,000 principal back at the end of the period. If, on the other hand, you purchased $100,000 worth of units in a bond mutual fund, you may or may not receive $6,000 in income each year (of course you might in fact receive more but, then again, perhaps less), plus when it's time to "cash in" your mutual fund units at the end of ten years, they may be worth less than $100,000 (or, yes, they may be worth more).

Because of the potential volatility of the bond market, it seems to me that the true low-risk investor would be far better served by purchasing individual bonds and holding them to maturity, rather than buying a bond mutual fund.

Is there anything in my reasoning which misses the mark? - J.B.

One way to avoid this risk is to build your own bond ladder. Instead of investing the full $100,000 in ten-year bonds, stagger the maturities. Perhaps have one-fifth of the bonds mature every two years. If the principal is not required, you can then roll them over into new ten-year bonds at that time. This strategy ensures that every two years you will have $20,000 in capital available to you if needed. - G.P.

I'm not rich but have a net worth of about $600,000 and am nearing retirement age. My children are well off and won't really need much of my inheritance.

Could you tell me, is this a good place for some or all of my funds? - K.R.

To your question. As I am sure you realize, the insurance agent has a strong vested interest in persuading you to invest the proceeds of the policy in a new universal life policy. He will earn a tidy commission if you do, which will be paid annually as long as the policy remains in force - a sort of annuity for him.

There is nothing wrong with universal life and in some cases it may be a good choice. But your agent is hardly unbiased in this regard. Moreover, he cannot offer you a full range of investment products; he's limited to those that are available through the company or companies with which he deals.

My advice is not to allow yourself to be "sold" anything. Rather, first determine exactly what your financial priorities are at this stage in life. They could focus on estate planning, but they may also relate to cash flow, retirement income, capital growth, debt repayment or other things. Once you have decided on your priorities, then you will be better positioned to explore the investment options that best meet your needs.

If you need professional assistance, you might want to consider engaging a fee-for-service financial planner, one who does not sell any products but who charges by the hour for his or her time and advice. This way, you should get an unbiased view of what direction you should be considering. It may cost a few hundred dollars, but that's not a lot in the light of what's involved. - G.P.

Some brokerage firms offer reduced-rate RRSPs for fixed-income securities like bonds. These are self-directed plans, but they are limited in terms of what you can put into them, hence the lower annual fee. - G.P.

And just to clarify a point, I made no reference to the U.S. election which has nothing to do with interest rates. - G.P.

It's also important to remember that our ratings are not based solely on recent performance numbers. These are an important consideration, of course. But we also look at long-term results, management depth, style, volatility, and many other factors. Templeton uses a deep value style, which means they have not participated in the high-tech run-up because most of those stocks are too pricey and therefore don't meet their criteria. So they look like laggards right now. But if the bottom should fall out of the high-tech market, as it threatened to do last spring, they will look like geniuses. A well-balanced fund portfolio will include both value and growth funds so as not to be overly exposed if something like that should happen. - G.P.

At the same time, they also announced that the Hansberger Value Fund will be renamed the C.I. Global Value Fund. These moves effectively sever the final ties between C.I. and Hansberger. - G.P.

With assistance from a financial advisor, I have so far contributed my RRSP monies directly into individual mutual fund companies by regular electronic transfers from my bank account. I am considering not going through a financial advisor for my RRSPs, but doing this on my own.

I would like to set up a self-directed RRSP account (and for my wife) from which I can easily control where I want my RRSP monies to go (mutual funds, stocks, or some just cash).

I would like some recommendations on institutions that offer good services in the this area and are reliable/trustworthy.

Some features I would like are: - Ability to switch between fund companies without penalties. - Good variety of funds offered/brokered.

Your advice would be appreciated. - K.Q., Calgary

However, switching between companies is something else again. Unless you're dealing with no-load funds, it will likely cost you something. If you've bought your funds on a back-end load basis, there will be a redemption fee. If you use front-end load, you'll have to pay that charge for the new fund. You may, however, find a financial advisor who is willing to acquire funds for you on a front-end load basis at zero commission, in order to collect trailer fees. Check out that possibility.

Also find out what restrictions may be applied to the self-directed plans you're considering. For example, can you buy funds from companies that don't pay trailer fees, like Phillips, Hager & North? In many cases, you cannot. Also ask to see a sample of the monthly report you'll receive. Some are rather sparse in their details. And, of course, ask what it all will cost.

I cannot really recommend one institution over another - I have never gone into that level of detail on each individual plan. But at least this will give you some criteria to use in making a decision. - G.P.

There are, however, a couple of paid subscription services that can be accessed through the Internet, the best-known of which is Morningstar (www.morningstar.com). There is a lot of free information available on their site and you can subscribe to their Premium Service for $99 a year. - G.P.

The best known fund of this type is probably the AGF Managed Futures Fund. It has done well recently, with a gain of 35.3% for the year to July 31. However, over the longer term it has struggled. If you'd invested in it five years ago, you would have lost an average of 6.6% a year.

To sum up, it's not the type of fund I would normally recommend - it only gets a $ rating (the lowest) in my annual Buyer's Guide to Mutual Funds. But some people like the excitement. - G.P.

Some provinces have made limited exceptions recently but none, to my knowledge, extend to financial hardship conditions. - G.P.

Historically, profits on these units have been taxed as capital gains and distributions as dividends. However, the Department of Finance had brought forward a proposal to tax the gains on all non-Canadian IPUs as income on an annual basis.

Fortunately, it now appears that measure is being withdrawn, at least as it applies to U.S.-based IPUs, following a storm of protest from investors. So the old rules should continue to prevail: you'll only pay tax on profits at the capital gains rate, and then only when you sell. - G.P.

If you move to another firm, there are usually some costs involved -- typically an account closing fee and/or a transfer fee. This should not be significant, however.

However, you do have to be careful if you are transferring a registered account (RRSP, RRIF). The new firm may re-evaluate the portfolio, using the current market value as their new book value. That could play havoc with your foreign content. Ask the new company you're considering what the situation would be in this case. - G.P.

There is also quite a bit about annuities in Gordon Pape's 2000 Guide to RRIFs and LIFs. The current edition can be purchased through our Web site bookstore now or you can preorder the 2001 edition for delivery in November. Details are available on the Home page of the Web site (www.gordonpape.com). - G.P.

2000 Tax Rates

Taxable Income Income Dividends Capital Gains British Columbia $7,232 to $30,004 25.40% 6.83% 16.93% $30,005 to $57,319 37.40% 21.83% 24.93% $57,320 to $60,009 41.12% 24.01% 27.41% $60,010 to $74,241 47.66% 32.18% 31.77% $74,242 to $81,101 49.11% 33.16% 32.74% $81,102 and up 51.26% 34.61% 34.17%

There are a couple of alternatives. If the RRSP is large enough, you could consider setting up a self-directed plan and putting your mortgage into the RRSP. That way you could improve the return within your RRSP and not get hit with a big tax burden. There's a chapter on how to do this in my annual Guide to RRSPs.

Alternatively, if you are relatively young, consider taking a more aggressive approach to your RRSP investments. Mortgage funds are not going to generate very high returns for the foreseeable future. - G.P.

One good way to increase your savings is to commit a portion of any "windfall" money to that purpose. Say you get a raise of $100 a month, after tax. Put half of that into your savings program and spend the balance. If you get a financial gift (perhaps from a relative) do the same thing. It makes the whole process easier. - G.P.

Another option is to go to the Globefund Web site (www.globefund.com), go to the Reports section, and click on BMO Investments Ltd. When the results come up, click on the quartile rankings. They will show how the fund has performed over time against its peers (1 means it was in the top 25%, 4 means it was in the bottom 25%).

Yet another source of information is my annual Buyer's Guide to Mutual Funds or our On-Line Mutual Funds Database, both of which provide in-depth analysis of how all funds are performing. It would cost you nothing to switch out of a BMO fund since the family is no-load. - G.P.

If something like this should happen again, an announcement will be made by the fund and it will be reported in the media.

The funds are regulated by the federal and provincial governments, and submit regular reports to show that they are complying with their legal responsibilities. - G.P.

This financial services emphasis is the reason why the Advantage fund fared poorly in 1999 and early 2000. However, the fund has an excellent long-term record and has rallied recently — the three-month gain to Aug. 31 was 10.3%. So there is nothing wrong with holding it as part of a diversified RRSP portfolio. It just shouldn't be your only Canadian stock fund.

Templeton International Stock Fund does not invest in North America. It is a value-oriented fund that focuses on Europe and the Far East, with some Latin America and Emerging Markets representation. Like most value funds, it has struggled recently although its long-term record is very good. Here again, we would not recommend that this be the only international fund you hold in your plan.

We find it odd that, since you are investing through a credit union, you have not been advised to put money into the Ethical North American Equity Fund, an excellent U.S. stock fund that is owned by the Credit Unions of Canada. We suggest you ask about it.

As far as GICs are concerned, there is nothing wrong with having some as part of the fixed-income component of a conservatively-managed RRSP.

Your main problem appears to be one of diversification. You should sit down with an advisor and work out a properly-structured plan. - G.P.

This is a unit trust that is offered by First Trust Portfolios, the Canadian subsidiary of the Chicago-based firm of Niké Securities. It is a portfolio of stocks in about 20 of the world's largest pharmaceutical companies. The current version now on sale for registered plans is the RSP Pharmaceutical Trust 2000 Portfolio, which has been structured in such a way as to make it 100% RRSP-eligible. It can be purchased through brokers at net asset value (NAV) plus commission; recent price was $17.66.

Although the portfolio focuses on one sector of the economy, the pharmaceutical industry is relatively low-risk and has good growth potential. This makes the trust suitable as part of a well-diversified RRSP. The original Pharmaceutical Trust, which came out at $15 in 1996, was recently worth $43.67 a unit, for a gain of 191% in a little over four years. - G.P.

Here's an example to work with. This year I plan on contributing $10,000 to my RRSP (for the 2000 tax year). Of this, $5,000 will go to a venture capital fund. Of the remaining $5,000, how much foreign content can I have? - P.R.

To look at the specific case you mention, if the $10,000 represents the total amount in the RRSP, then the maximum foreign content is $4,500 (45%) in the year 2000 and $5,000 (50%) in 2001. Since you are investing $5,000 in the labour-sponsored fund, that means in 2001 the rest of the plan could be in foreign content. However, that is not something we would advise since it does not provide for good diversification. - G.P.

Up to age 80, the basic rules governing LIFs and RRIFs (registered retirement income funds) are much the same. Both are subject to the federal government's annual minimum withdrawal formula. As you point out, a LIF is also subject to a maximum annual withdrawal, which is established by the provincial government under whose jurisdiction the LIF falls.

At age 80, RRIFs and LIFs part company. A RRIF can continue for a lifetime. Until recently, however, LIFs had to be converted to life annuities at 80. Several provinces have now passed legislation that allows LIFs to continue on, however, as a life retirement income fund (LRIF). You should check the rules in your province of residence to see if that option is available to you.

Yes, you can have a self-directed LIF, just as you can have a self-directed RRIF. Discuss this with your plan administrator. - G.P.

There are numerous Internet sources that offer extensive information. You may want to browse through the RRIF area of the Retirement Planning section in the Fifty-Plus.Net Web site (www.fifty-plus.net) for a wide range of information. Many financial institution sites also contain useful material on RRIFs. For technical information on RRIFs, check out the Web site of the Canada Customs and Revenue Agency (www.ccra-adrc.gc.ca). - G.P.

One other point. You make it sound as if you only have one fund in your RRIF. We hope that is not the case, but if it is we would certainly suggest that Growth & Income is a far better candidate for that role than Enterprise is. - G.P.

What are the rules for withdrawing from an RRSP? - R.A.F.

You say you want to supplement your pension income. You can do so by making periodic withdrawals from the RRSP. Each withdrawal will be subject to withholding tax at source — the amount will depend on how much you take out. Except in Quebec, the withholding rate is 10% on withdrawals up to $5,000, 20% on withdrawals of $5,001 to $15,000 and 30% on withdrawals of more than that. Of course, you get credit for taxes withheld when you file your annual return. If you make several withdrawals within a year, the RRSP holder may also charge a fee so check on that point.

The advantage of doing it this way is that you only need to take out what you need. That may be less than the minimum RRIF withdrawal requirement that is laid down by the federal government.

Also, you can continue to contribute to the RRSP if circumstances change — perhaps you'll start your own business and generate earned income. You can't contribute to a RRIF. - G.P.

5% - Money market fund. If you are planning to spend a significant amount of time in the U.S., you may wish to put some or all of this in a U.S. dollar fund to protect your currency base.

15% - Low-risk fixed-income funds. These would include mortgage funds and short-term bond funds.

20% - Medium-risk fixed-income funds. Regular bond funds would be appropriate here, as well as foreign bond funds.

30% - Higher-yielding fixed income funds. In this case the mix will include dividend funds, high-income balanced funds, and high-yield bond funds.

15% - Canadian equity funds. Choose funds that are conservatively managed. You can use a systematic withdrawal plan to generate income from this source.

15% - U.S. and international equity funds/balanced funds. Again, a systematic withdrawal plan can be useful here. - G.P.

1) Make sure your RRSP has the cash reserves needed.

2) Understand the long-term impact on your retirement savings of using the plan. You can end up losing tens or even hundreds of thousands of dollars off the end value of your RRSP, depending on your age and how much you borrow.

3) Implement a damage control strategy that will minimize the impact of the home loan on your retirement savings. This can be as simple as paying it off faster than the government allows, to more sophisticated strategies that will actually allow you to come out ahead at the end of the day. We outline several of them in the book.

For technical details on how the Home Buyers' Plan works, visit the Web site of the Canada Customs and Revenue Agency (www.ccra-adrc.gc.ca). - G.P.

My plan is to study up on this, but not to take out any insurance until one or the other of us is left. It is highly unlikely that we will both die at the same time. Is my thinking along these lines correct? - J.K.

Second, you make the assumption that by the time one spouse dies, the other will still be insurable. That may not be the case, or the premiums may be so large as to make it unfeasible.

If you feel at this point that having an insurance policy to provide the money needed to pay for the taxes that will be payable when the estate passes to the next generation, you should seriously consider putting such a policy in place now. Check out all the options and decide on which best suits your needs and pocket book. A last survivor term policy might be a good choice. - G.P.

ING Direct was offering 5.5% on their investment savings account recently, but now I see they have reduced the current rate to 5%. Details at http://www.ingdirect.ca

I understand some small trust companies and credit unions have high interest savings accounts in the 5%-5.5% range, but you'll have to do your own research there.

It's not a savings account but close to it: Equitable Trust is offering 5.45% on 30-day GICs.

Remember that rates on all savings accounts can change any time. Since there appears to be a possibility that interest rates may rise again, there could be more 5.5% offers in the next couple of months. - G.P.

Our life income fund was managed by Canadian Western Capital. Sometime about mid-year 1999, our advisor (along with the rest of his office) left CWC and became part Pacific International Securities. Every year we have been withdrawing the maximum allowable amount from the LIF near the year-end. After the transfer to Pacific International occurred (June), we received a cheque from CWC for $6,588.79, which represented the minimum withdrawal for 1999.

We subsequently requested the balance to the maximum of $13,833.72 be paid out. We were informed by Pacific International that this would have to be done through CWC. We provided the necessary information on November 29, and they filed this request to CWC.

CWC never did send the balance of the moneys and they have been bought out by another company which further complicates things.

From the information we received, it appears that the investment house that holds a LIF on January 1st of the year controls the payments for the year and legally is only required to send the minimum payment. I wondered if you can confirm whether this is true or not and if there is any reference material on these type of details for LIFs.

We are unhappy with how our advisor handled this situation and would like to move our money. However, we are afraid that the same thing will happen again if we move so would like to be clear on the matter. - J.M.

1) The assets in the LIF belong to you, regardless of which company is administering them. They do not form part of the corporate assets of the administrator. A LIF is a trust.

2) Since the assets are in a trust, payments are from that trust. The administrator only puts through the paperwork. So all these corporate changes shouldn't matter. It sounds like someone is giving you a runaround, but whatever the case you certainly didn't get the desired result. To make matters worse, I don't know if anything can be done at this stage. 1999 is long gone. I have never heard of a case where LIF payments could be back-dated and of course you did not declare the extra income on your tax return.

I suggest you do the following. First, contact your financial advisor and ask for an updated statement of the assets being held in your LIF. Make sure the totals agree with your own. Next, see if it is feasible for a cheque to be issued, based on the fact the formal instruction was given last year. I don't hold out a lot of hope, but you can always try. Point out that CWC has nothing to do with all this any more -- your LIF is administered by PI, the assets are in their hands (presumably) and they can release them within the legal parameters allowed.

If your rep gives you a runaround, insist on talking to a senior manager. If you don't get satisfaction, let it be known that you intend to take up the matter with the appropriate provincial regulatory authorities, which would be the Securities Commission and the Pension Board.

None of this may do any good if the law simply doesn't allow the administrator to make what amounts to a retroactive payment, but it certainly puts the company on notice that you are dissatisfied with their actions. Your story also serves as a warning to others. - G.P.

Usually, if you switch to another fund within the same company, DSC charges do not apply. There may be a switching fee of up to 2%, but that's negotiable with your financial advisor and often he/she will waive it for good clients.

To avoid the DSC trap, see if you can work out an arrangement to buy all your units in future using the front-end load option. You should be able to do so at a fee of no more than 2% — otherwise check around for someone else to handle your business. Some financial advisors offer front-end load funds at zero commission. The idea is to build their business so they can collect the annual trailer fees paid by the fund companies. - G.P.

You are also allowed to roll over $1,500 a year for each year or part-year up to and including 1988 for which no money was vested for you in a company pension plan or deferred profit sharing plan. If that applies in your case, you have an additional 17 years of credits, worth $25,500. So you could be allowed as much as $73,500 in RRSP rollovers.

Note that this is over and above any regular contribution to which you're entitled.

If you arrange to have the money rolled directly into your RRSP, you'll avoid having any tax on that amount deducted at source. You'll need to complete form TD2. If you receive the money directly, you can make the RRSP contribution within 60 days after year-end. But there will be a source deduction, which of course you will recover when you file your tax return. - G.P.

1. I know that in the United States many municipalities issue bonds for which the interest is tax-free (both federal and state, I believe). Do such bonds exist in Canada (especially the "tax-free" part!)?

2. How can I find out the current interest rates being paid on new bond issues (federal government, provincial governments, corporate bonds, etc.)? I would assume that there are "one-stop" Web sites which would provide this information - am I right? - A.P.P.

Capital gains are not a problem. The tax treatment is the same, whatever the source of the gain. - G.P.

Whether this is "reasonable" depends on the level of service you are receiving, the total cost you will end up paying, the performance of your portfolio and the overall degree of satisfaction you have with the advisor. That's a question only you can answer, but now you at least have a starting point from which to make your assessment. - G.P.

Maybe you'll get lucky. The fund you mention gained 51.1% in the year to Sept. 30. But if the fund underperforms or, worse, loses money, you're not going to be a happy camper.

One of the keys to investment success is proper diversification. Mutual funds offer that because they hold a number of securities in their portfolio. But the manager must operate within the mandate he or she is given. A money market fund won't invest in stocks. A Canadian equity fund won't invest in foreign bonds. A resource fund won't invest in science and technology.

So to have a well-diversified portfolio, you need to hold more than one fund. The CI Global Boomernomics Fund is a good one, with a global mandate, a balanced approach, and an excellent record so far. But it has not been around for very long, so we don't know how well it will do over five or 10 years. The GIF (segregated) version provides a guarantee against loss after a 10-year hold, but that's a long time to wait if the fund should go into a prolonged slump.

The bottom line is that a single fund approach will add considerably to your risk. You are much more likely to find yourself worrying about day-to-day performance than you would if you invested in a more diversified portfolio.

It is not a course I would recommend. - G.P.

So for your non-registered portfolio, you may want to consider investments that are more tax efficient. High-quality preferred shares, such as those offered by the major banks, are one option since their payments are eligible for the dividend tax credit.

As far as timing is concerned, how will you know when interest rates have peaked? Even professional bond traders are never sure. For the ordinary investor, attempting to time bond or stock markets is a losing game. If you want to invest in bond funds in the RRIF, choose a couple of good ones with low MERs and let the managers worry about the timing. - G.P.

You are making payments to the RRSP mortgage from outside the plan as required by the terms of the contract. You as the borrower are the mortgagor; you are giving the lender (your RRSP) your pledge of payment and a claim against the title of your property in the event of default. So the RRSP becomes the mortgagee. This means you can't pay off the mortgage from inside the RRSP as this would be a case of the RRSP paying itself (the mortgagee paying the mortgagee) and there would be no viable investment arrangement. So you must pay off the mortgage from outside the plan in order for the contract to make any legal sense. - G.P.

We are splitting income of about $50,000 at approximately 60 - 40 and have a tax accountant. I pay very little income tax as almost half of my income is derived from dividend paying stocks. I do hold growth stocks as well.

Looking at our overall financial picture, is it ok for us to leave our RRSPs, a modest amount of approximately $120,000 as of now, in compounding GICs rolling over every 5 five years with staggered maturities? We will not access any of these funds until the mandatory dates for us which is December, 2004, the year we turn 70 years of age. Hopefully, if those funds are not needed, or only partially needed, I will re-invest. How difficult would it be to place each maturing GIC in another investment, which may incur switching fees, as well as having so many on-going decisions for me to make if you answer that I should not stay as we currently are with our RRSP GICs? - J.K.

In this case, J.K. hasn't told us how much income she believes they will require down the road. They are currently saving $1,000 a month, so from that we can infer that they are already living very comfortably on the income they have. But we know nothing about their future needs or desires (a sunbelt condo, perhaps?) or about their estate planning goals.

Based on the information she has provided, there appears to be no need to move away from the conservative GIC approach in the RRSP. If you don't need to take more risk at this stage in your life, why should you do so? Allow the interest to continue to compound tax-sheltered within the plan, even after it is converted to a RRIF, and don't worry about it. The RRIF income will be icing on the cake since they already appear to have enough to live on very nicely. Think of it as inflation protection.

One technical point. J.K. says: "We will not access any of these funds until the mandatory dates for us which is December, 2004, the year we turn 70 years of age." We assume that she realizes she will have to convert to a RRIF a year earlier, when they both turn 69. However, the first withdrawals from the RRIF don't have to be made until the next calendar year, which is why she refers to age 70. It's an important distinction. - G.P.

If you keep the RRSP, you leave your options open. You can make withdrawals from the plan if you need the money. These will be taxed as income, exactly the same as if they had come from a RRIF. The difference is that you retain the option to stop making withdrawals if your situation changes. So there is a flexibility in this approach that the RRIF does not provide.

We suggest you discuss the situation with your advisor in this context and see what he/she has to say. - G.P.

The only way in which you would be able to split RRIF income with your spouse would be under a settlement arrangement if the two of you should split up. It seems like a rather extreme way to save a few tax dollars! - G.P.

U.S. dollar money funds that meet this test include those offered by CIBC, CI, Guardian, HSBC, Investors Group, National Bank, PH&N, Scotiabank and TD Bank.

As a general rule, I suggest you choose a no-load fund since it doesn't make sense to pay a sales commission to acquire a money market fund. - G.P.

While I feel quite certain that self-directed plans are the way to go, I am having a little difficulty deciding which company would be the best for me. I am comparing several companies with respect to administration costs, costs to buy/sell securities, on-line research, and client assistance. Could you please give me some advice on selecting a firm and list some of the questions I should be asking of them. - I.G.

1) What kind of advice can you expect? Will you have to make all the decisions yourself or can you count on help from a professional advisor? If the latter, who is the advisor, what are his/her qualifications, how long has the advisor been at this job and how well do you relate to the person. This is a critical issue because while the cost of an advisor-assisted plan may be a little more, the help you receive in making your decisions may be well worth it.

2) What restrictions are there on the plan? Every company has its own rules and some of them may cause problems. For example, some companies set an arbitrary foreign content limit on RRIFs that is lower than the maximum allowed by the government.

3) What do the statements look like? Some companies issue excellent portfolio statements that clearly show the assets, the original purchase price, the current market value, the foreign content position, the account activity in the past month and a lot more. Other companies are still in the Dark Ages in this regard.

4) Are there special charges that may affect you? For example, do you want to set up a systematic withdrawal plan? If so, is there a special fee attached and how much is it?

Combining these with the research you are already doing should help you select a company that will be right for the job. - G.P.

Extensions are allowed if you meet certain conditions. One example: before Oct. 1, 2001 you pay contractors or suppliers a sum of money at least equal to the amount you withdrew under the Home Buyers' Plan.

If you can't meet the time limit, and don't qualify for an extension, you may either buy or build a replacement home or cancel your participation in the HBP and repay the money. You cannot sit on a piece of raw property indefinitely.

Your questions relating to claiming expenses on your tax return aren't clear. You cannot claim any expenses relating to the cost of your new home. If you are asking about declaring a portion of the withdrawal as income because you haven't yet built, that is not an issue here. You still have time to fulfill your obligation in that regard. - G.P.

You say your commission came to more than $1,000. That means you invested something like $135,000 in the PH&N funds. For an order that size, I don't understand why you would not have gone directly to the company itself. You would have acquired the funds without any commission and, if needed, you could have sought their guidance on portfolio balance.

The obvious message is that anyone making a substantial investment in no-load funds should consider dealing with the fund company itself rather than going through a discount or an on-line broker. You will almost always pay some kind of fee if you buy through a broker (even if it is only an exit fee). There's no harm in going back and asking them to renegotiate the commission. All they can say is no. But I suspect you'll just have to live with the cost and take a different course next time. - G.P.

Specifically, what criteria should be used in deciding between, for example, a Royal Bank bond yielding 6.5% and Royal Bank preferred shares also yielding 6.5%? Does the bond's coupon rate matter, or is the current yield all that's important? The fact that either issue will likely be purchased in the "secondary market" also muddies things in my mind. Is it preferable to buy "new issues"? Is this even possible? - R.L.

Inside a RRIF, it's a different story, however. The dividend tax credit has no bearing since all money taken out of a RRIF is taxed at your marginal rate, whatever the original source. So you need to apply some different criteria. These include:

1) Term to maturity or next call date. All bonds and most preferreds have a maturity date. Many preferreds can also be called at the option of the issuer, which is usually done if the coupon rate is higher than the market rate at the call date. Before you invest in any security of this type, find out how long you can hold it for. The call date may be just months away.

2) Yield to maturity. The coupon rate means little if you are buying a bond or a preferred in the secondary market (yes, you can buy new issues, check with your broker). Even the current yield may not mean a lot if the bond or preferred is priced at a significant premium or discount to par. For example, a preferred with a current yield of 8% may look very attractive – until you probe further and see that it is trading at $26.50 but can be called at $25 in 12 months. That means you would suffer a capital loss of $1.50, which would significantly reduce the yield to maturity which takes into account both the interest/dividends and any capital gain/loss.

3) Credit standing. Bonds take precedence over preferreds in the pecking order if the issuing company runs into financial difficulty.

4) Payment method. There are two main types of preferred shares – fixed rate and floating rate. The fixed rate preferreds pay the same dividend at all times. The floating rate preferreds pay a variable dividend that is based on a standard measure such as the Bank of Canada rate. Most bonds pay a fixed interest rate, except real return bonds – their rate is adjusted to reflect changes in the cost of living index.

5) Capital gain/loss potential. Fixed-rate securities have greater potential for capital gains or losses than those with a floating rate.

Generally, when all the variables are sorted out, bonds from comparable issuers will be found to produce better returns for purposes of a RRIF. - G.P.

All RRIF withdrawals are subject to tax at your marginal rate, no matter how large or small they are. When tax is withheld at source, a credit can be claimed when you file your return. - G.P.

1. On average, how many stocks do you recommend to buy/hold as of a particular day? Put in another word, into how many parts should I divide my capital -- if your recommendation list has 30 stocks, does it mean I have to divide my capital into 30 equal parts ?

2. Would you keep on recommending stocks to buy but not sell? My capital is limited!

3. Do you recommend to sell all if market is not good? Example: did you recommend yjay investors to sell all their shares during April 2000 and November 2000?

4. What is your performance history -- say 1 month, 3 months, 6 months and year-to-date – if an investor follows your recommendations to buy and sell shares? - W.W.

1. At the present time, there are about 75 current recommendations. These includes, stocks, debentures, royalty trusts and mutual funds. You would not invest in all of these or even a majority. We recommend different types of investments for different needs – from very conservative to speculative. Our members know which type of investor they are and choose accordingly. All investment recommendations are carefully explained as to risk.

As well, some of our investments are divided between special portfolios, each with its own objective. Thus we have a Blue Chip Portfolio, a Value Portfolio, a Growth Portfolio and a Mini-Internet Portfolio. A value investor, for example, would be unlikely to choose any of the stocks in the Growth or Mini-Internet Portfolios.

2. We sell stocks all the time. The newsletter dated Nov. 20 recommended selling the remaining position in a stock in which we have already taken half profits, locking in a total gain of 134.5%.

3. We never recommend to sell everything. That is not an approach I believe in. You can never predict what the markets will do. We sell selectively.

4. We don't keep an overall performance record because of the diverse nature of the securities we recommend. We do, however, report regularly on the performance of the special portfolios and, of course, of individual stocks. Not all our selections are winners – but I don't know of anyone who is 100% perfect. We're very proud of our record. Of the 17 stocks currently showing as sells or sell half on our list (which is posted in the member section of the Web site), 11 were winners (some very big winners) and six were losers. - G.P.

I still like the fund and it gets a $$$ rating in the 2001 edition of Gordon Pape's Buyer's Guide to Mutual Funds. However, the climate for bonds appears to be changing. The economy is slowing and that could mean that interest rates will begin to decline next year. If so, more conventional bond funds will perform better. They struggled when rates were on the rise, but they've done better recently and could produce returns in the 8% - 12% range next year.

The best results in a falling interest rate environment will come from funds that specialize in long-term bonds, such as the Altamira Bond Fund.

In sum, don't make the Real Return Bond Fund your only choice. Add some other types of bond funds as well. - G.P.

However, the younger you are, the lower the percentage of your fixed-income securities should be. The reason is that you have more years to live off your retirement income. Therefore, you should not put yourself in the position of drawing down capital too soon. Bond funds produce a relatively low rate of return compared to some other investment options. You may want to consider supplementing them with dividend funds, high-income balanced funds, and high-yield bond funds, as well as equity funds.

We recommend that you discuss your situation with a financial advisor who can help you arrive at the best asset mix for your needs. - G.P.

"You are not considered a first-time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, you or your spouse owned a home that you occupied as your principal place of residence.

"Example: You want to participate in the HBP in 2001. To be considered a first-time home buyer, you or your spouse cannot have owned and occupied as your principal place of residence a home at any time during the period beginning January 1, 1997 and ending 31 days before your withdrawal in 2001."

As you can see, the operable date in your case is the time when you moved out of the house. At that point it was no longer your principal residence, and the HBP eligibility clock started ticking. The date you sold it is irrelevant, as long as you didn't move back into it again at any subsequent time. - G.P.

If you sell the foreign fund, your new book value will be $6,000 ($3,000 in the Canadian fund and $3,000 in cash). The foreign content limit is 25% in 2000, rising to 30% in 2001. If we use the 30% figure, this means you could reinvest a total of $1,800 in foreign funds (30% of $6,000).

If you sell the Canadian fund, your book value will stay the same, at $4,000. This would give you no additional foreign content room, other than the additional 5% allowed in 2001. G.P.

Under this program we can invest in the recommended indices and any individual stocks without incurring commission costs. Rather we would pay an annual fee of between 1% and 1.25% (instead of the 2% - 2.75% with mutual funds). The annual fees are tax deductible. The most important point here is that the portfolio would grow on a tax-deferred basis, thereby avoiding the taxable distributions with mutual funds. My planner tells me that I would be looking at about $2,500 in redemption fees. What is your view? - F.G.

The only suggestion I can make is to ask the planner to do a retrospective analysis of what would have been the result over the past, say, three years had you followed this course rather than doing what you did. What would have been the comparable returns and the costs?

Also, keep in mind that index investments look better in rising markets than in falling ones. Also, Canadian index investments are highly skewed because of the Nortel factor. You may wish to ask for his comments on these points. - G.P.

I suggest that you ask the brokerage firm for a performance history of each of the separate pools within the plan (Canadian equity, U.S. equity, etc.). Also ask for clarification as to how these numbers are arrived at – do they include management fees, for example. If they don't, then you have to discount the returns if you want to compare the results against an average mutual fund of the same type. For example, suppose you are told that the Canadian equity pool gained 12.5% in the past 12 months, not accounting for a management fee. Your management fee, paid separately, is 1.5%. That has the effect of reducing the net return to 11%. Now you have something you can use to compare against a benchmark of your choice: the TSE 300 Index, the average Canadian equity fund, or whatever seems right. When you apply that test to all the possible pools in which you might invest, you can get an idea as to whether the program as a whole is outperforming, underperforming or about even with the relative benchmarks. - G.P.

As far as Old Age Security is concerned, the 12-month back payment rule also applies. Here's what the Web site says: "If you apply after age 65, you can receive a back payment to cover up to 12 months of payments which include the payment for the month you applied. For example, if you apply for the pension when you turn 66, you would receive a back payment for 12 months of benefits. The back payment is calculated from the month that we receive your application."

For more information, go to http://www.hrdc-drhc.gc.ca/isp/ - G.P.

The Investment Funds Institute of Canada, which has its headquarters in Toronto, is a voluntary association of mutual fund companies. While it does not act as a policeman for the industry, it does set regulations for its members so if you have a situation that appears to violate one of their regulations you could address a complaint there. The Web site address is http://www.ific.ca

Finally, if the matter is very serious and appears to involve some kind of unethical or even illegal activity, you should complain to your provincial securities commission. Each province has its own commission. Contact them directly for information on how to file a complaint. - G.P.

There is a chapter on this subject in Gordon Pape's 2001 Buyer's Guide to RRSPs. The basic formula is that you are allowed a credit of $2,000 for every year or part-year you worked for the employer prior to 1996 – no credit is given for years after that. You say you have been with the company 32 years, which presumably means you started in 1968. This means you have 28 years of service for purposes of this calculation, which would allow you to roll $56,000 into an RRSP. Since that is more than you expect to receive, the net result is that you will be able to put the full amount of your severance into your plan, thereby avoiding a big tax bill.

Incidentally, there are additional credits allowed if you were not a member of a company pension plan, but in this case they aren't needed.

If you choose not to deposit part or all of the severance payment, that money will be taxed as regular income in the year it is received. - G.P.

Tax breaks are a form of government expenditure – money that the government would otherwise collect but instead gives back. For all intents and purposes tax breaks are a form of government assistance, i.e. welfare, and the wealthy certainly do not need this or any other manner of welfare.

I would suggest that in addition to your financial advice to the well-to-do, that you also provide commentary on how such advice inevitably shifts the tax burden on to "others less able to carry it", and how this advice in turn impacts on issues of social justice. Perhaps you could offer financial advice to the working class and the poor, as well as to organizations that advocate on their behalf. The wealthy do not need welfare, but the working class and poor may benefit from further assistance. - D.S.

It has apparently become obvious to the Liberals in recent years that you can't keep feeding sawdust to the donkey. The kind of onerous tax burden that was placed on the middle class in this country (forget about the rich, there's not enough of them to matter) has reached the point where it is counter-productive. That's why we are seeing a belated attempt to try to redress the matter. Taxing the middle class more only exacerbates the brain drain and stifles initiative. You don't have to take my word for it – there are plenty of academic studies that verify the point.

There are many people in the media that are experts in the field of social commentary. That is not my area of expertise and it is not a subject I am professionally equipped to discuss. My advice obviously isn't going to be of any use to the poor, but it certainly has been helpful over the years to many, many middle-income people. I know that, because they have told me so. I'm sorry my comments frustrate you, but I believe many others find them valuable. Perhaps you will too, one day. - G.P.

"Last August we told you about a bank scam that has been privately worrying securities regulators for some time. However, until recently, they haven't said much, if anything, about it publicly. Finally, we have some details from the Ontario Securities Commission and the RCMP.

"The scheme involves offers with legitimate-sounding names like Prime Bank Notes and Prime Bank Debentures. You are offered a financial instrument of some type from an organization with all kinds of official-sounding credentials that may claim to be affiliated with a well-known body like the International Monetary Fund. The hook is that you get to take part in a risk-free arrangement that is normally only open to leading international financial institutions. You are promised an incredible rate of return (perhaps 20% a month) and complete secrecy (great if you want to evade taxes on your windfall). You get a fistful of legal-looking documents to sign and, of course, you're expected to hand over a very sizeable cheque. There are also financial inducements to bring other people into the scheme (have your friends and family get scammed too!). Of course, your money disappears, efforts to trace it prove fruitless, and you end up being another victim.

"When I first wrote about this in August, I suggested that if you're ever approached with this kind of offer you should remember the old adage: ‘If it sounds too good to be true, it probably is.' Interestingly, the OSC and RCMP included exactly that same warning in their recent press release." - G.P.

I have a question concerning the allocation of foreign content in RRSPs which does not seem to be addressed in your RRSP Guide. I am aware that the foreign content limit is 25% in 2000 and 30% in 2001. But how is the limit allocated? If I have more than one plan, does it have to be plan-specific (i.e. 25% of each plan), or can I have 45% in one and 5% in another, and as long as the total book value of foreign content stays under 25% of the total RRSP book value of both plans?

I have a self-directed RRSP with Scotia Discount Brokerage, which currently has 0% foreign content. I would like to purchase some foreign content mutual funds such as the HSBC European Fund but directly from the fund company, which I currently do not have an RRSP with. If the foreign content limit is plan-specific, that would mean I can't just buy one fund (namely the European Fund) from HSBC, since it would mean 100% foreign content in my HSBC plan? Or is it okay as long as the amount I purchase at HSBC is within 25% of the total book value in my combined plans? - P.S.