Disappointing News on Banking Ombudsman

Today, the Financial Post features an article about federal Finance Minister Jim Flaherty saying that he "will not force the country’s banks to resolve client disputes through the Ombudsman for Banking Services and Investments (OBSI) and is set to unveil new rules and regulations that will allow financial institutions to hire their own mediators to sort out disputes with clients."

Royal Bank and TD have used private mediation services for the last few years since opting out of OBSI. The world may not be falling dramatically apart because of this but it is and will be worse as made clear in the comparison table of OBSI vs TD and Royal's private mediator ADR Chambers, published today as it happens by Fair Canada. Harm by small individual abuses is harm nevertheless.  Blessing and encouraging the expansion of private dispute resolution will further tilt the scales in favour of the banks over consumers. As the hoary expression goes, "he who pays the piper calls the tune".

UFile Giveaway Winners

The draw has been done. Congratulations to these three winners of the giveaway: IG, Aidan and Be'en. Please contact me via the "email me" link in the right hand sidebar and I will send you the code to enter to use UFile for free.

WaterFurnace Renewable Energy(WFI): 2011 YE Dilemma

Last month WFI published its annual report of 2011 results. For investors, the report along with the conference call (available on CNW), the annual information form (AIF) and the information circular paint a positive picture on some fronts offset by negatives on others and overall stagnation.

Competition from Natural Gas
When I made my original assessment of WFI 18 months ago, I concluded that the main constraint on the company's renewed growth was US housing starts and that when the US housing market recovered, sales and earnings growth would begin again. Not so certain, it now appears. The success of fracking and the resulting now plentiful natural gas supplies causing low gas prices are providing another big restraint on potential home geothermal heat pump installations. Consumers do the math and conclude that natural gas is cheaper, as the annual information form concedes: " ... very low natural gas prices will put competitive pressure on geothermal heat pumps if availability and low gas prices persist." That's probably why WFI said in the conference call that the residential market was down 9% in 2011.

That something else besides housing starts is affecting WFI's residential sales is seen in the fact that US starts did rise steadily through 2011, a condition about which management said the following in the Q1 report: "Housing starts are forecasted to be 600,000 by the end of 2011, despite the overhang of foreclosures and tighter bank lending practices. The residential replacement market will continue to be the single greatest opportunity for geothermal heat pump installations for the next several years. As residential new construction revives, then this will present a significant upside opportunity for the business." Housing starts reached 700,000 in December yet WFI experienced falling residential sales. The latest AIF still doesn't include natural gas prices amongst risk factors.

The discussion of the economics in the Wikipedia geothermal heat pump article tells us that the economies of scale on capital costs benefit commercial large buildings much more than residential, making systems more cost effective for commercial buildings, which is most likely why WFI's sales in that segment continue to grow.

WFI management says it is also looking more to international markets for growth - in the UK, China and South Korea - and also in the commercial sector. Maybe, but possible success is in the future and not evident now. The Hyper Engineering acquisition of 2011 in Australia is having no discernible effect except that shares issued for the purchase helped dilute earnings per share by 1 cent to $1.14.

Not-so-good Numbers in Financial Statements
Several 2011 numbers aren't good for investors, though not disastrously so.
1) Executive and employee compensation was way up - What justifies executive compensation rising 31% and employee salaries and benefits 13% (while employee headcount dropped from over 300 to 287) in 2011 given that company earnings and sales stagnated and the stock price dropped dramatically? The $1.7 million or so excess increase over what a 3% inflation rise would have been represents $0.14 cents less in earnings per share. Has the Board (whose rise in fees was only 2.6%) been paying attention? It is a dilemma to invest in a virtuous green company only to have management and employees grab an increasing share of the profits.
2) Warranty claim provisions rising faster than sales - Note 12 in the financial statements records another whopping increase (27%) in provisions for warranty claims, a big chunk of which is due to an increase in claim rates, as opposed to more units under warranty from higher sales. How this jives with an assumption stated earlier in the annual report that unit failure rates will remain the same as in the past is not explained ( I sent the company an email asking for an explanation and have not received a reply). Warranties have become a significant part of balance sheet liabilities and of cash flows (as a non-cash item added back). In the future if the reserves are correct or too low, when warranties are honoured/paid out, the warranty cash flow will reverse and become a drag on cash flow. There will be much less leeway to keep up dividends. If the reserves have been too high, earnings will get juiced by one-time upward adjustments. It is getting harder to understand how profitable WFI actually is.

In short, WFI has become much less attractive than before with its current sales geography and product mix, perhaps not to the point of selling, but management needs to deliver on expansion to new regions of the world and/or through new products.

UFile Tax Software Giveaway

Here's an opportunity for all the last minute tax filers to use UFile, one of the packages I rated highly recommended in my annual review last week. UFile has been one of the best packages ever since I started doing assessments several years ago.

Dr Tax, the makers of UFile, have supplied me with three codes for the online web version of UFile to give away to blog readers. With the code you can prepare your taxes for free, a value of $15.95 for an individual return, or $24.95 for a family (spouse and dependents).

This is how the giveaway works:

• To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software; use a unique name (Anonymous won't suffice!) so I can distinguish people
• One entry per person please
  
• Entries close Friday, April 20th midnight EST
• I'll do a random draw of three (3) names from amongst the entries after the deadline
• Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the UFile software (your email will not be used for any other purpose than to contact you as a winner)

Best of luck and remember to file by the deadline of April 30th. UFile, like the other NETFILE certified packages, lets you do it online quickly and conveniently.

Review and Ratings of Canadian Online Tax Software: 2011 Taxes Edition

Tax time again! For the 6th year running, these are my ratings and assessments of the best and the worst of the online tax preparation programs available to Canadian taxpayers for 2011 tax returns. As before, I've gone through all the packages certified by the Canada Revenue Agency for electronic submission of a return through NETFILE. The same ratings method has been used but the results are a bit different. Some packages are better, some just the same as last year, one is sadly worse and there's one new entrant.

Ratings Method: total score out of 45 max points on 5 factors

1. Privacy and security (10 points) - How well does the online tax prep company protect your data and your privacy? What do they promise and what evidence is there of their capability to deliver? As I said last year, it is unfortunately still the case that this is the most uncertain area of the ratings - my numbers could be fairly wide of the mark - since it is hard to get much tangible proof of the reality vs the promises made, even compared to the minimal promises as are publicly made on the websites. Only one company (Acetax) actually claims to have been audited by an external party. CRA does not do anything, as they woefully admit in the disclaimer on the webpage with the list of packages, to check up on the companies and how they handle our data, which I think is shocking and unacceptable, given that a lot of people likely believe that NetFile certification somehow gives assurance of security protection.
2. Flow, readability and layout (10 points) - How does the appearance and the flow of the program guide the taxpayer through all the steps, ensuring that everything is entered correctly in the right places? Is it easy to go back and forth, to review results and check one's work or make changes? The programs vary enormously on this factor, from simple on-screen versions of the paper forms, which merely do the arithmetic correctly and transfer amounts (or are supposed to!) between forms, to sophisticated interview processes akin to interaction with an accountant, asking questions to uncover all income and deductions and credits.
3. Help (10 points) - How much access to explanations about tax rules is provided and how well placed is it? One of my on-going pet peeve test items is the infamous T1135 Foreign Income Verification Statement which a taxpayer with foreign property over $100,000 in cost must fill in, sign and send in to CRA. Does the program tell you, ideally at the point when you have to tick that box, that it is not required for foreign holdings within registered accounts like RRSPs? Some do not say so and others do not say that the T1135, if required, cannot be done online and that it must be submitted by mail on paper. Failure to send in a T1135 can be very painful.
4. Responsiveness (5 points) - How fast is the online application at saving data and refreshing the screen? slow = frustration! Some of the programs are a lot more reliably responsive, an important factor if you are in the final throes of meeting the April 30th deadline.
5. Accuracy (10 points) - How good a job does the program do at calculating your taxes and helping you legally pay the least amount? For those who think that NetFile certification means the programs will all come up with the same answer (as I believed myself before starting to look at all these packages a few years ago), it is time to recognize the reality. As I commented two years ago, CRA's certification only means the program is correctly including all the revenues. the programs differ enormously in their ability to automatically detect and claim all deductions and credits to which you are entitled. As a result, in my own case with all the packages my total income on line 150 was identical but balance owing on line 485 showed different amounts, anywhere from a few dollars to a few thousand dollars apart. In the cases where I had thousands less to pay this was the result of incorrect eligibility for deductions that the programs did not prevent. It is only because I used them all that I got to learn what should be the correct result. Some are much better than others at preventing incorrect input but it is always worth the time to use a couple of the programs to enter your data and compare the results. They all allow you to see the bottom line in much detail, if not actually to print or submit the completed return. The very best package (TaxChopper) at using deductions and credits for an individual and/or shared amongst family members is almost like having a skilled accountant doing your taxes - it is essentially an expert system for income tax. Three examples tested the packages' ability to optimize using age amounts and pension splitting, tuition and education transfers, foreign tax credits with inter-provincial residence thrown in for the trickiest rule. In no case did any other package beat TaxChopper - it always found deductions, transfers and credits to use and end up with the lowest taxes to pay. The difference was about $250 on a total refund of around $6000 for the fictional test family. Optimization can be very worthwhile.

Rankings:

Highly Recommended
#1 TaxChopper - 40 points - a repeat winner
"A tax expert system – Delivers on the biggest refund / lowest tax to pay promise. Best value for money."


#2 UFile - 38 points
"Polished, easy to use and handles all but the more sophisticated tax reduction optimizations"


Recommended
#3 H&R Block - 35 points
"Technically, it's UFile but it has a few less desirable privacy features"


#4 TurboTax - 33 points
"Guidance every step of the way with plenty of questions, reminders and some useful suggestions for future tax planning"


#5 EasyCTAX - 30 points
"Biggest improvement since last year's “beta version”. Now a credible product."


#6 AceTax - 29 points
"Just fine for those who need minimal help and are familiar with tax forms"

#7 (tie) WebTax4U - 26 points
"For those who know where things go and are familiar with tax forms"


#7 (tie) EachTax - 26 points
"Looks like the forms; for those who know what forms to use. Much improved responsiveness."



#9 Taxnic - 24 points
"OK package if you know what forms to fill and credits to claim. What CRA would give us if they created a NetFile package – no error checking or optimization, just the forms and correct transfer of amounts from box to box and form to form."



Merely OK
#10 MBOTax - 20 points
"It's like working with the paper forms except amounts get transferred automatically and arithmetic is done correctly."


#11 eTaxCanada - 19 points
"New interface a step backwards. Works ok if you know what you are doing and which forms to use"


Not Recommended
#12 - FileTaxOnline - 13 points
"Not recommended – too many weaknesses, some fatal"



#13 5DollarTax - 3 points
"Crude, half-finished effort, not worth using."


#14 FASTnEASYTax - not rated
New this year. Doesn't support rental or self-employment income, or returns for Quebec, Yukon, Nunvaut, NWT