Preferred Shares:
a fixed-income alternative to enhance income

Fixed-income securities broadly refer to any investment where its issuer promises to make payments on a regular basis. Not long ago government bonds - which used to pay 6-to-8 per cent - provided safe and decent returns. They acted as portfolio diversifiers, generating income and reducing risk. Well, you don't need me to tell you that things have changed. Today, the Government of Canada (GoC) 10-year-bond yield is barely 2 per cent!

Low government-bond yields encouraged investors to assume further credit risk to obtain higher returns. That demand pushed corporate bond prices higher. Now credit spreads for corporate bonds over government bonds - that 'extra' interest compensation for the higher risk of default – are stubbornly low as well. That's why there's greater need than ever to further diversify fixed-income securities within your portfolio.

Before central banks began meddling with long-term interest rates, the yields on perpetual preferred shares were pretty similar to those of 10-year GoC bonds. Now that yield spread over the GoC bond has widened.Preferred shares are a notch above investment-grade corporate bonds on the risk structure. As with bonds, there is an element of predictability to their dividend payments. Here are some other useful things to know about preferred shares:

• They tend to pay a fixed dividend rate as long as they are issued and outstanding.
• They have a stated dollar (called "par") value per share when redeemed by the company that issues them.
• Unlike bonds, they often do not have a maturity date.
• They can be called or bought back by the company at a set price after a period of time.
• Prices trade up and down, but historically, they have a low correlation to both bonds and common stocks.

Without a noticeable pick-up in real economic growth, bond yields may stay low for some time to come, and stock markets will likely remain volatile. So it's good to know that in such times, investors can benefit from less volatile and higher yielding assets like preferred shares.

Here at WDS, we watch for quality preferred shares that yield upward of 4.5 per cent. When we see these assets being offered by reputable, stable companies in these turbulent times, we buy them for our clients' accounts. They offer good value and the right kind of diversification benefits to keep your portfolio well-balanced and still growing at a respectable rate of return.

Read more: Are preferred shares a good buy? MoneySense Magazine

RESULTS
at a glance

Watch for complete market analysis in
WDS Investment Perspectives coming in July.

ASK & ANSWER
What can I do with unused net capital losses?

ASK
My 2012 Notice of Assessment highlights that I have $3,702 of unused net capital losses. Under what conditions do I get to deduct them? When and how do I claim the deduction?

ANSWER
Net capital losses have restricted uses. Usually, they may only be used to reduce taxable capital gains, that is, like-kind income from capital property that's appreciated in value. Examples of capital property that most of us are familiar with are stocks, bonds, mutual funds and real estate.

Net capital losses carry forward indefinitely. So it's not a matter of "if" you'll get to claim them, but "when" – in what future year. You get a last kick at previous years' gains, too! You may carry those losses back to any of the preceding THREE tax years. Going back is often the preferred course of action. You want to be sure to take advantage of the write-downs before those years' gains become untouchable.

Net capital losses are claimed on line 253 of the T1 return. Now, bear in mind that the loss you claim cannot exceed the gain you report on line 127 of that particular return. To carry back a loss, you need only file a Form T1A, Request for Loss Carryback along with your current year's tax return.

Net capital losses cannot – unfortunately – be applied against dissimilar types of income, such as employment, pension, or investment. The only exception to this rule is in the year of death. So always report your capital losses in the year in which they arise. Someday…someday…they'll come in handy.

CRA Line 253 – Net capital losses of other years provides step-by-step instructions

WDS READS
The Energy of Money: A Spiritual Guide to Financial and Personal Fulfillment

Maria Nemeth, Ph.D., The Ballantine Publishing Group, March 1999

How's this for an opening sentence of a book?

"Imagine being able to approach your finances with a sense of optimism, clarity and openness, instead of dread."

Wow! A real page turner!

This book was an unexpected gift – both literally and figuratively – to me. For some time I've danced with Dr. Nemeth's notions of your Life's intentions and Standards of Integrity, only using different names for them. Before this, though, I'd not connected my sense of personal fulfillment with being fully conscious about money. Needless to say, I had my own share of "AHA" moments completing her exercises. This book is not a once-and-done read. I know that I'll return to its stories and 12 principles again and again.

Praise for The Energy of Money

"The Energy of Money is empowering and exciting. Anyone who has ever been concerned about money will find both the cause of the problem and the solution in these pages. I thoroughly enjoyed the practical and eye-opening exercises throughout the book. They are very effective at getting to the heart of our relationship with money and healing it."
– Christiane Northrup, M.D.; author of Women's Bodies, Women's Wisdom

YouTube: The Energy of Money clip uploaded by Lori Savage

Heads Up!
Estate administration faces greater scrutiny

The Ontario government introduced changes to the Estate Administration Tax Act ("EATA") regarding estates and their administration – what used to be called "probate law". Compliance responsibility in this area has now shifted to the Minister of Revenue.

Starting in 2013, the Minister may require prescribed information about the deceased person's assets owned at death and a declaration of each asset's value. This change presents a new, greater risk for executors and estate trustees because the Minister may now go back FOUR years and reassess the tax payable by the estate.

Prudence dictates that declared values must be able to be substantiated. So far, there is no clearance certificate that would release an executor from liability in such cases. This could mean cautious executors may want to delay the full distribution of an estate to its beneficiaries.

As it is now, the amended law, its regulations and processes are still vague. We'll stay tuned…and keep you informed.

FRIENDS, FAMILY MEMBERS AND WDS

Wealth management is not just about finding the best investments for clients' portfolios. That's the last stop on the road, the place where our job ends. Long before picking the stocks and bonds, we help people assess and understand what they really need.

With pension plans disappearing, individuals are challenged to know what to do with their retirement nest eggs and how to get them to produce the best possible income during retirement. That's where we come in. We help you make a plan for your life that will take you where you want to go.

When you spot a need for advice that we might help fill, have your friend or family member come talk to us. We want to help.

We thank you for your support and appreciate all your referrals. Your confidence means everything to us, and we'll work hard to justify it.

PLEASE NOTE: The information presented in this e-newsletter is of a general nature only and does not give advice on any particular matter. It is not intended to replace personal, professional advice based on individual circumstances.