Wednesday 30 April 2008

Inheritances and Inheritance Tax for Canadians

Question from a Reader:
"My wife has landed immigrant status in Canada, and has lived here for over 20 years. Her father has recently past and has left her aprox $30,000 Cdn. What are the laws in Canada towards this Money. Is it declared as income? Is there an inheritance tax that she will have to pay once she receives the money? Everything I read says Canada does not have an inheritance tax but I'm sure our Government will take a chunk some how."

A Canadian taxpayer receiving an inheritance from inside or outside the country does NOT include that money in their income. It is tax-free. Our tax collector the CRA says so here.

There is no inheritance tax in Canada, thankfully. The closest thing is the rule that a deceased person is deemed to have sold everything on the day before their death, which can trigger capital gains to pay, or a very large income all at once, for instance when RRSPs are considered to have been terminated and all of the proceeds are taken into income. The person who pays such taxes is the dead person, or more accurately, the estate of the deceased. By the time the cheque arrives to the inheritor, all those taxes must have been paid out of the estate, otherwise the executor is liable (not the recipient). Executors make sure they are not exposed by getting a written clearance certificate from the CRA stating that all taxes have been paid.

The only taxes your wife would pay is on any gains or income from investing that money afterwards.

Inheritances that a Canadian receives from abroad are also not taxed as income by the recipient. The foreign country with an estate or inheritance tax, like the USA or the UK, will have levied its taxes before the money can be distributed.

In general, even in countries which have an inheritance tax, by the time the money is delivered to the recipient, any inheritance owing should/will have been paid. It's the estate that pays.

My condolences on her losing her father.

Tuesday 29 April 2008

Online Payment of Income Taxes to the Canada Revenue Agency

Should you find yourself in the unfortunate position (or fortunate, if you look at it as the fact that you have had a loan from the government during the past year) of owing money to the Canadian government once you have calculated your taxes for this year here's a tip for how to do it easily online.

It's important to get your tax money in on time to avoid late payment penalties, in fact more important than sending in the return itself. I doubt whether CRA would penalize you for sending in the money on time but not the return (they certainly don't penalize you when you don't owe anything and file a return only a year or more later). One of the pieces of advice I have read in the past is that if you do not know and for some reason cannot figure out how much you owe by the deadline, take a guess and send that in right away. If it manages to cover the amount owing as figured out later, then you avoid paying onerous interest as CRA's rates on arrears are much higher than you could earn on the money in a bank account.

Here's how to do it. The Canada Revenue Agency has set itself up to receive payment online through the electronic biller facility offered by every financial institution of note in Canada. The list of institutions and instructions are at this CRA page.

When combined with electronic filing of the tax return through NetFile, you can indulge procrastination tendencies and do things at the last minute!

Though I wouldn't push the bill-payer payment capability too far since there is a caveat that the payment is not guaranteed to be instantaneous. BMO's disclaimer says, "It may take up to 5 business days for your payment to be reflected on your biller's account." My experience is that 99% of payments go through within one day. Based on past discussions with the bank on this subject it seems that the speed depends partly on the payment receiver and its accounting systems. It would be interesting to know if the CRA applies the same rule for these electronic payments as it does for paper where the postmark is the key to proving the payment was made in time. Just in case, it's good to write down the reference number for the online payment, which is time and date stamped.

The online capabilities are a boon to anyone immobile, remote or out of the country who may have to pay taxes from afar, like me (though I only owe the CRA $0.66 ;-).

Money and Happiness

Quick and worthwhile reading: an article from the 2006 summer edition of Moneysense magazine titled Professor of Happiness. I especially like and agree with the perspective of this quote - "People with money have more freedom than others to construct their lives around activities that provide both meaning and pleasure." The advice on how to give money its proper place and perspective makes a lot of sense.

Such advice may be lost on Canadians who are already quite happy it seems. The First Ever Map of World Happiness ranks Canada the 10th happiest country in the world, ahead of the USA (23rd) and the UK (41st). The ranking has probably gone up some recently, with Canada winning the world curling championships for both men and women. Of course, the NHL playoffs aren't over and the world hockey championships are about to begin so that figure may yet rise or fall.

Those with an academic bent can examine the seemingly serious attempts by economists to quantify the relationship between money and happiness, complete with log-scale graphs, at the Freakonomics blog in a series on the The Economics of Happiness.

Sunday 27 April 2008

Canadian Earning UK Income and The Double Taxation Convention

A reader asks:
"I was wondering if you could help shed some light on the double taxation convention between the uk and canada. Currently I'm working in the UK for over a year, but im still a Canadian Resident. I've been paying my taxes here in the UK, however I found out my accountant wants around 9500 Canadian as well. I'm still considered a resident in Canada because I'm paying healthcare and have bank accounts, but no income made in Canada. I was wondering would the Double Taxation Convention apply to me? And would I just tell his to my accountant to work out?"

It sounds as though you would be considered resident for tax purposes of both countries. In the UK, you are Resident if you spend more than 183 days in a tax year from April 6th to the following April 5th (not the calendar year). In Canada, it depends on your ties to the country, the most important so-called primary ties being a spouse, family/dependents and a home but others like those you mention also being included. The onus and burden of proof to becoming non-Resident seems to be to actively sever ties, otherwise you are likely to be still considered Resident.

When you thus become Resident of both the UK and Canada, the Canada-UK Tax Treaty I wrote about on March 25th comes into play to determine how the two countries divvy up your tax money.

In the case of employment income, the country where you earn the salary gets first dibs and deducts whatever taxes are owing according to its rules, in your case, the UK. Then, because you are also Resident of Canada, you have to report the same income again on a Canadian return, calculate the Canadian taxes owing on the same income by the Canadian rules, claim a credit for the taxes deducted in the UK and if you owe anything more, pay that to the Canadian government. In fact, you almost certainly would owe Canada some more since Canadian tax rates on income are higher than those of the UK (see comparative table here). But that's a good thing since you cannot get a refund from either country if you overpaid according to your "home" country.

The Canada-UK Tax Convention says that the UK can tax your employment income earned in the UK in article 15.

For convenience, I've made a table that summarizes the different ways that the Treaty deals with various types of income and taxes, like dividends, capital gains, pension payments, annuities and interest.

Maybe the $9500 is the extra your accountant figures you owe the CRA. Any good accountant should be aware of the treaty so you should be able to get confirmation from him/her about the above.

Friday 25 April 2008

Review: #3 (tied) H&R Block Web Software Tax Preparation

This is my 2008 review of the H&R Block web-based online tax preparation package. I rated it 8.0 out of 10, tied for 3rd with WebTax4U and AceTax. H&R is the new kid on the block this year, so to speak, as it was not on the NetFile certified list in 2007. But it may not be so new after all ... it looks like H&R simply paid uFile to rebrand its best-of-breed web application for its own use. Why are these references in the H&R Block license agreement - "AGREEMENT TO USE UFILE..." and "AUTHORIZED USE OF UFILE" and "You agree that H&R Block Canada, Inc. Dr Inc. is not required to contact you in any other manner whatsoever." Probably the lawyer doing the search and replace messed up. The colours are different but the workflow and the look and feel are identical between the two programs. I suppose there is nothing wrong with that but why pay $19.95 to H&R Block instead of $15.95 to uFile for the same thing?

The image is a screenshot of the H&R Block application.

What I Liked about H&RBlock:
  • all the same technical stuff as for uFile applies as well to H&R Block

What I Disliked:
  • to create a logon id you must give your name (uFile doesn't request this btw) but an FAQ says this info is collected to enter you into a contest for web customers. Suppose you don't want to be in the contest? Then you must write in to not be included. Or if you want to be in the contest under the "no purchase necessary" rules, all you need to do is write a 250 word essay and post it in!
  • the Privacy Policy allows H&R Block to share your information internally for other marketing purposes. You have to contact them to opt out, which is a hassle. Just let me do my darn tax return and don't bother me. Their lawyers must have carefully checked that this statement from the Privacy Policy complies with the PIPEDA law but it sure looks marginal to me: "Unless you otherwise inform us, utilizing the contact information above, visiting this Web site or using the products and services of H&R Block, you consent to the collection, use and disclosure of your personal information..." The onus seems to have reversed from the company to the customer.

Thursday 24 April 2008

Review: #3 (tied) AceTax Web Tax Software

This is my new 2008 review of the AceTax web-based tax preparation software package for Canadian taxes that goes along with a series of posts done last year on other online tax prep packages. I gave it a score of 8.0 out of 10, tied with WebTax4U and H&RBlock.

The image is a screenshot of this program.

What I Liked About AceTax:
  • easy and fast to register, clear and simple explanation on how to get started; pricing well explained
  • FAQ is pertinent and concise
  • the embedded help buttons go direct to the relevant CRA page for tax information
  • layout, font, formatting and colours on the screen are unobtrusive and easy to read
  • navigation from box to box by tabbing is quick and easy; the line where the entry cursor is gets highlighted to visually confirm where you are
  • the whole program works fast
  • there is a button in My Account to permanently delete all your data from AceTax once you are done should you so wish, if you are concerned about privacy or later data leaks
  • price is very good at $9.44 including GST for new customers and only $7.34 for returning customers, and free for under $25k family income
What I Disliked:
  • seems to log one out due to inactivity sooner, like after 5 minutes, than the stated 15 minutes
  • would be better to have the list of completed T-form entries on the left menu column to facilitate editing
  • needs to show a capital gains total to enable cross-check with my off-line paper records to discover any data entry errors;
  • a bit more help throughout could be useful, e.g. needs an explanation that "Number" on the capital gains entry form means number of shares
  • would help to have a running total of taxes payable or refund, e.g. to help figure out how much tuition to transfer from a child

Friday 18 April 2008

Malt Whisky: Investing in an Alternative Asset Class for Pleasure and Profit

A professor stood before his class with a selection of items in front of him. When the lecture began, he took a very large glass, filled it up with large stones. When the glass was full, he asked the students :
"Is the glass filled up now?"
Everyone agreed that it was.
The Professor took some very small stones, and placed them gently into the glass while shaking it very carefully, causing the smaller stones to go in between the larger stones.
When the glass again was filled up to the edge he asked once more :
"Is the glass filled up now?"
Everyone agreed that it was filled up.
When the professor placed a bag with sand on the table the students laughed, because the professor could add sand between the stones, and he filled it to the top.
"Now!" said the professor "Please imagine that this glass is your life!"
The large stones are the meaningful things in your life, family, girlfriend or boyfriend, kids, your health etc. things that are important and will always be a part of your life. The small stones are stuff not that important , like your job, house, car and the sand is everything else.
"Please notice ! If the glass is full of sand there will be no room for small and large stones. It's the same in life, if you use your time and energy on small stuff there will be no room for important and meaningful stuff.
Always focus on which things are important for you, and your life will be great and happy.
Play with your kids, see the doctor, take care of your health. Spend time with your partner, there will always be time to work, clean up the house and the other smaller stones!"
"Fill up your life with large stones that really matter. Check and arrange your large rocks and stones and keep in mind that the rest is only smaller stones and sand."
All the students nodded as they saw the point!
The Professor then looked over the students and took a glass of whisky, which he carefully poured between the sand, the smaller and the larger stones.
He looked up again and said:
"And the moral is - No matter what happens in your life there will always be room for whisky!" (joke taken from the Alternative Whisky Academy Funstuff page)

One of the many gifts that Scotland has given the world along with curling and golf, not to mention legal, intellectual, engineering, educational, literary contributions (for a highly enjoyable and informative book about this, have a go at Arthur Herman's The Scottish Enlightenment) is Scotch whisky, especially the single malts.

I was reminded last weekend while stopping in Inverary (in the attached photo, that's the whole of the tiny town behind one of Her Majesty's warships in Loch Fyne) at the Loch Fyne Whiskies Shop that malt whisky can be an investment as well as a taste delight. There on the shelf behind the counter sat a bottle of 1919 Campbelltown malt, for sale at the modest price of £14,000! He said that it was one of two bottles left in the world and that as soon as it was sold the price would likely go up to £20,000! No one should ever drink it since it would likely not be that good. The imagination and the mystery from the old unopened bottle, like owning a living bit of the past, would give far more pleasure to the owner than the actual taste.

However, if that's the kind of profit that can be made, maybe it's worthwhile to consider as an alternative investment. According to a 2004 FAQ on the price of whisky, the record price was £29,400 for an 1850 bottling of Bowmore.

In answer to my query, the proprietor confirmed that there is an active market for collectors and investors in rare and old single malts. The interest is worldwide. Swedes and Germans are apparently very fond of the "water of life", or uisge beatha in Gaelic, but there are many other lovers of a dram.

The proprietor warned against trying to invest via cask purchases due to the practical difficulties of bottling and storing and marketing (who will want to buy your whisky?). He advised that buying individual bottles is a better method of investing. Bruichladdich (a lighter, less peaty Islay malt) is one distillery that offers to sell casks to individuals. Buying a 2008 cask at £1100 (bourbon) or £1450 (wine) would produce 300 to 380 bottles after ten years. Are you that patient?

Good Investment in Bad Economic Times? - The BBC reports that whisky producers find that sales increase when the economy slows down. Given the current state of the economy, maybe it's now (Sept 2008) a good time to look at whisky, including mainstream drinks companies like Diageo (NYSE: DEO) and Pernod Ricard (shares on Euronext).

Markets and Prices: Thanks to the Internet, there is an active and visible market, in which prices can be researched. These consist of auction sites:
eBay - search for whisky
McTears - live auctions in Glasgow in March, June, September and December; past sale prices are archived and available for reference
Whisky Auction - online auctioneer

General Knowledge and News: There is no shortage of websites for aficionados with plenty of links, descriptions, tasting notes, live events.
DramNation - reviews the above auction sites, has a on-line shop, lists the many distilleries, user discussion forum
VisitScotland - primer on whisky, links to events in Scotland, tours and travel info
Alternative Whisky Academy - lists and comments on shops around the world, index of whiskies, lots of links to whisky related websites

Books: Books are a great way to learn about whisky, the history, the variety of malts and opinions on what tastes best. The longest list of books I've found is at The Whisky Exchange, where they can be ordered online along with malt whiskies and other exotic alcohol.

Single malt whisky has been around for hundreds of years and it is a hugely successful product, whose popularity has not stopped rising. The inherent quality and pleasure of a good malt gets a price boost from a certain snob appeal in certain quarters. Old bottles are getting scarcer and even new supply is constrained by water supplies (of all things in Scotland!) and even barley I was told at one distillery.

Ultimately, the problem for any potential investor is trying to predict what will be popular. Even bottlings that are generally considered to be fine tasting today may go out of style. The one bottle worth a lot in a collection (portfolio?) may be weighed down by a number of others whose value stays the same. The Scotch Whisky Review from Loch Fyne Whiskies recommends collecting for pleasure but not investing. Even if one does try investing and it does not work out, at least there is the means at hand to drown one's sorrows!

Slainte Mhath!

Update Nov.3, 2008 - Signs of supply constraints - the CBC reports that Diageo is withdrawing brands from New Brunswick because it is a low margin sales area, i.e. they can make more money in places like India, China and Russia. This confirms an article in the Guardian from last December that reported rumours of such impending action.

Thursday 17 April 2008

Moving Money Around the World: FX Dealers Links

In this final (for now) post on my investigations into moving money from country to country, I've listed below the 14 FX dealers I came across recently on the Internet. There is quite a good selection of FX dealers available to meet a variety of needs. Though they all appear to be legitimate and viable businesses, i.e. not scam, dodgy or incompetent operations, before committing large amounts of your own cash, I would highly recommend that you check them out yourself. You certainly need to winnow down the list to a few that could effectively meet your particular requirements.

I should note that there were a couple of FX websites - not in the list below - that look dodgy to me as they seem to be agents only who promise to find you an FX dealer, a service that is less than necessary and probably costs a significant chunk of your money.

I've already registered with CustomHouse, Canadian/Oz Forex and MoneyCorp and will likely sign up with HiFX since it doesn't cost anything initially or on-going, even if one doesn't trade at all. By having several accounts with different dealers, it is possible to compare rates and services, perhaps using different ones at different times for different needs.
  • CustomHouse - Canada, online focus, 15 currencies, EFT in Canada & USA, takes cheques, sends Wire or Draft, good FAQ on website, email scanned docs ok for ID
  • - Canada, different website and company but uses CustomHouse as FX back end with same rates
  • OzForex - Australia, others sites are trade names on same back end - Canadian Forex, UKForex, NZForex, online & tel trading, 24x7 M-F, 14 currencies, in by EFT (Australia, Canada & US), BACS, CHAPS (UK) and Wire, delivery by Wire, email scanned docs plus compliance phone call for ID, max 1 year forward, min $2000 transfer; owns Tranzfers for smaller amounts; client funds segregated; supplies "near real time rates" on home page and has tiles to add to your own website to track live rates
  • HiFX - USA, tel trading only, "major currency pairs", segregates client funds, very friendly, max 2 year forward rates, min $5000 single transfer, reimburses bank receiving charges, recurring payments, accepts Wire, CHAPS, BACS, Cheques (< $50k)
  • TorFX - UK, offices Australia, Spain, tel trading, focus on buying property, emigrating, allied with tax accountants and estate agents
  • MoneyCorp - UK, offices in USA, Europe, Australia, tel trading only, £10billion turnover, part owned by Royal Bank of Scotland, segregates client funds, reimburses bank receiving charges, 85 currencies, max 2 year forward, ID verification electronic, min single trade £5000, accepts Wire (Canada, US), BACS/CHAPS, Cheques, Credit Card, hours 7:30-22:30 M-F, 10:00-16:00 Sat
  • HaloFinancial - UK, founded 2003, "many currencies" including KRW, segregates client funds, accepts Wire, BACS/CHAPS, Cheque (£ only), hours 08:00-20:00 M-F, max 18 months forward
  • WorldFirst - UK, £2 billion turnover, 24 major plus other European, Middle East, Far East currencies, min $1800/£1000 single transfer, max 1 year forward
  • CurrenciesDirect - UK, offices Australia, Spain, Dubai, £1.3Billion turnover, max 2 year forward
  • CurrencySolutions - UK, office Cyprus, tel trading only, min £3000 single transfer, max 2 year forward
  • InterchangeFX - UK, min £1000 single transfer, tel trading, max 1 year forward, accepts Wire, BACS/CHAPS
  • AFEX - USA, accepts Cheques, delivery by Wire, Draft, tel trading, max 1 year forward, min £10000 single transfer
  • FirstRateFX - UK, tel trading only, max 2 years forward rate, focus on property market in Dubai, France
  • ForeignCurrencyDirect - UK, accepts BACS/CHAPS, Cheques (£ only)
Anyone with experience of any of these FX dealers, or others I may not have found, please add a comment.

Wednesday 16 April 2008

Moving Money Around the World: Extra Services and Practical Details of Using FX Dealers

This third installment on the options for moving funds from country to country focuses on foreign exchange (FX) dealers. I outline a number of practical considerations that differentiate FX dealers from one another and from banks. I found that these aspects can heavily influence which dealer is best placed to meet my needs.

Registration / Signing Up and Money Laundering - all FX dealers everywhere will require you to sign up or register as a customer. None of them charge for it and there are no fees or requirements to trade at all. The requirement to sign up stems from international agreements to prevent money laundering and terrorism financing. To register you must provide documentation of your identity and a fixed address. Typically, this means a copy of photo ID like a passport or driver's license plus something with an address like a utility bill. It all starts from the same recommendations of the inter-governmental Financial Action Task Force (FATF).

But each country seems to have implemented slightly different rules and the registration process is more or less of a hassle depending on the FX dealer and the country. Canada seems to be on the unduly picky end of the scale and it looks like it will get more complicated as the Canadian watchdog FINTRAC is introducing Guideline 4.6 on June 23, 2008 that will make it even more complicated by requiring either the client to be seem with original documents or to have them attested by a commissioner of oaths or a guarantor.

By contrast, OzForex accepts scanned and emailed copies of such documents, complying to Australian regulations.

In the UK, sign-up is even easier if you are a UK resident. Some dealers like MoneyCorp and Currencies Direct, are linked into electronic databases that enable verification while on the phone. Is it a case of the UK being negligently incompetent, or wisely light-handed, and Canada being prudently vigilant or obstructively bureaucratic? (Considering the huge gaps in control documented in studies like the World Bank sponsored The Canada-Vietnam Remittance Corridor, maybe what FINTRAC is doing could be likened more to aggravating the honest retiree than plugging the real holes of the informal international money conduits.) With OzForex, it seems not to matter in which country you reside since you are able to register via emailed scanned documents in Australia even if residing in Canada or the UK, or New Zealand and using those website storefronts - CanadianForex, UKForex and NZForex.

With banks, no registration is needed for currency transfers since the information was collected when you opened the account.

Though it should not be a concern to ordinary law-abiding people, it is a fact that big brother watches us all and large transactions (anything over $10,000) are reported automatically by FX dealers and banks. Anything "suspicious" must also be reported. In the UK, the reporting amount is EUR15,000 / £10,000 and reports go to the Serious Organised Crime Agency. That's why the FX dealer will ask you the purpose of your moving money internationally. There's no escaping this, no matter which country you live in. The WWB (World Wide Bureaucracy) is hard at work.

Security and Country of Regulation - all the FX dealers I found in my searches on the Internet were based in either Canada, the UK, Australia or the USA. When you sign up as a customer, you agree to be subject to the home base country's laws for any disputes. If you have large amounts at stake, like a transfer to buy a retirement home, that may be an important consideration. For instance CanadianForex is a subsidiary of OzForex, based in Australia, so your agreement is under Australian laws. Aussie laws may provide more protection than those of Canada (certainly, the mandatory product disclosure statement from Australia was informative, while there wasn't one at all from Canadian dealer Custom House) but if something happens where would it be easier to complain?

I'm not sure if all FX dealers do so, but all the FX dealers that I spoke to on the phone seemed willing to accept clients who live in almost any country. That means you can shop the world for an FX dealer. It seems any restriction would not be legal but practical in sending money to or from that place.

The security and stability of the organizations themselves may vary, though these days being a large financial organization may not itself be a guarantee of staying in business and not having your money unexpectedly tied up (holders of ABCP know what I mean!). One protection is for the FX dealer to hold your money, in the brief period it may be in their hands, in a bank account in trust in your name, so that if anything happened to the dealer, your money would be protected. TorFX and MoneyCorp, for example, do this but OzForex does not apparently ... though it is owned and backed by Macquarie Financial, a very large Australian bank.

It may help a little for security that the money laundering/anti-terror financing regulators keep a close eye on these companies (as well as the transactions of you and me, their clients), which may instill a more diligent work culture of audit and compliance. Beyond that, the reputation and business success of each dealer is what keeps your money safe.

To compare business reputation, one could ask questions Like:

  • when did they start up business? Of the ones below, the oldest are MoneyCorp and AFEX (both 1979), while the new boy is Halo Financial (2003).
  • How big are they in terms of staff or customers and sales? The biggest I found, and many do not provide that info on their website, is MoneyCorp.
  • What are their affiliations? - Does it help to know that CustomHouse is the official FX supplier to the PGA Tour ... if it is good enough for the world travelling pro golfers, is it good enough for you and me?

Offices, Local Knowledge and Affiliates - This is where FX dealers begin to stand out from the banks. The presence of an office and knowledge of the local banking system at both ends of a transaction can eliminate possible hassles. In addition, some dealers have developed region specialties, e.g. helping Brits establish themselves in retirement or vacation havens like Spain or France, and have allied themselves with complementary service providers like estate agents and tax firms. In contrast, my Canadian bank telephone representative knew nothing about BACS or CHAPS when I asked if it were possible to deposit money in a UK account that way instead of by wire.

Customer Service - It is most gratifying to call an FX dealer and not be shunted into a call centre telephone menu queue and end up speaking to a script kiddie who knows little and is on a timer to close the call. Of the half dozen FX firms I called, all were helpful, knowledgeable, patient and prompt. Some assign you an individual account rep.

In the previous post's example where I wrote about some live FX rates, it was only by being able to access them online that I could make the comparison. To get such data from the bank, the fastest way is to call, go through account authentication and telephone menus, wait for a person to come online, ask for the rate and wait for him/her to obtain it, all of which may easily take ten minutes. In the case of my bank, the telephone rep in the end could only give me a rate for exchanging $1000, saying that for $10,000 it would be less but could not specify how much less and said they could only pass me through to an actual trader for a real rate on $10k if doing an actual booking. Customer service, indeed!

Methods of Uploading Cash to the FX Dealer and Having It Delivered - Surprisingly there is quite a variation in the methods used, depending partly on the country where the dealer does most of its business. All support the basic standard that all banks use, wire aka telegraphic transfers, for both receiving and sending to destination. UK-based dealers typically accept payments by CHAPS or BACS, while forms of EFT are possible in Canada (on-line bill payment or pre-authorized chequing) and the USA (ACH/ABA).

A number of FX dealers accept cheques to upload funds to them, while some even accept credit cards (like MoneyCorp). On the delivery side, some will send payment to an address by Draft (e.g. CustomHouse), while most only deliver by wire or some electronic method.

Locking in Exchange Rates for Future Payments
For workers on overseas assignments with known pay to be received in a foreign currency and who wish to repatriate their earnings on a regular basis, currency swings may cause the end value to vary considerably, perhaps fall far below what they expect. The same goes for large purchases to close in a few months. Most FX dealers will allow you to lock in a rate today for a certain duration to eliminate that risk - e.g. HiFX. The future lock in
maximum varies from one year to two years. Usually a deposit of 10% of the amount is required for lump sums.

On-Going Scheduled Payments - Pensions, Salary
Many FX dealers will also automate the withdrawal, conversion, transfer and deposit of recurring small payments (the minimum varies from £150 to £250) from a source bank to a destination bank in another country. That takes a lot of the effort and hassle out of managing cash in two countries, for example, UK pensioners who retire in the warmer, cheaper climes of southern Europe, or Canadians in the USA or Costa Rica. When combined with guaranteed forward rates, a person's financial planning and budgeting can be greatly simplified.

Currencies Traded
The banks will handle, at a price, any pair of 'from' and 'to' currencies. All the FX dealers will handle the major currencies like the USD, GBP, EUR, JPY, CAD, CHF, but coverage beyond that varies according to their target market. The least number of currencies handled that I found was 12 at OnLineFX and the most was 85 at MoneyCorp. Check for the pair that you will need. Since I have a relative in South Korea wanting to send money out of that country, I tried to find one that would trade KRW (South Korean Won) to CAD. Only one said it could - Halo Financial.

Speed of Transfer
Strangely this seems not to be a great differentiator, unless financially out-of-the-way countries, like South Korea, are involved and intermediary banks come into the loop to slow down progress by weeks at times. The time it takes to move from one country/bank account to another seems to be more dependent on the country and its background banking settlement sytem than between companies. Wire transfers are the baseline, taking 1-4 business days. Some methods of uploading, such as BACS, take another 3-4 business days to clear before the funds can move on.

Countries Excluded
If you live in, or want to send money to, certain countries, some or all FX dealers may refuse your business. Places like Burma, Iran, Iraq, Russia and the Philippines may be excluded for various reasons - banking relationships too difficult, concerns about transparency and verifiability of individuals i.e. compliance with money-laundering regulations. Again, the exclusion of countries varies across different dealers. In general, the more mainstream you are, the more numerous are the viable FX dealer choices.

Telephone or Online Transactions and Hours of Business
All the FX dealers offer telephone transaction booking. In some case that limits their hours of business to the times at their physical office locations and some extend their hours by call forwarding around the globe e.g. OzForex is 24x7 M-F. About half the FX dealers offer online transaction access, which means access whenever you want it - very convenient. And the banks, well , they keep much more restricted hours - "the traders have gone home for the day so we cannot book a transaction".

Minimum Transaction Amounts
The minimum amount for a single transaction varies from £1000 up to £5000 at the various dealers. As mentioned in the first post of the series, for smaller amounts, money transfer services will provide service. Banks will transfer any amount. For all practical purposes, there is no upper limit (that probably excludes you, Warren Buffett).

My conclusion is simply that the variety of services available mean that no one company is best for everyone. You must shop around to find the one that best suits your needs according to their specialty, whether it be the straightforward lowest rate for mainstream currencies, or some less popular currency, or the convenience of online electronic trading, or a regional real estate retirement market niche. One thing for sure though, I believe that the much higher level of customer service and the possibility for prompt help from polite, well-informed staff that I found at a number of FX dealers, will be a pleasant surprise in this automated de-personalized world.

Friday 11 April 2008

Moving Money Around the World: Fees and the Exchange Rate

Many people are unaware that there are two elements that affect how much arrives at destination when doing an international transfer and exchange of one currency for another.

Fees and Charges
The first is fees, which can be numerous and complicated. Generally, fees are quite visible, though not always, as in the case of charges for moving funds through an intermediary bank, which happens without the advance knowledge or request of the person effecting the transfer.

Exchange Rate
The second element that affects the end amount received is the exchange rate, the number of units of foreign currency obtained in exchange for the origin currency. FX dealers or banks make profit on the difference between their buying and selling rates for a currency, termed the spread, so their profit goals affect how much you are offered. Whether you obtained a favourable rate on a transaction may not be so obvious since the rates change constantly in market trading.

Charges from Origin to Destination
The attached chart shows how charges may arise at different points along the way from the origin bank account to the destination. Banks always wire transfers while FX dealers may offer several options for uploading funds from the bank account or delivering them to the final destination that may provide cost savings. If one is doing a lot of transfers or transferring large amounts of money, the savings may be considerable, as I will show in succeeding posts.

Intermediary bank charges are especially annoying. One FX dealer has this to say: "Some banks may use an intermediary bank to process their incoming international transfers. Again, charges vary from country to country. Transfers to Russia and India for example are routed through New York, often through a preferred partner or an intermediary. In the USA, the average charge is $23.00. In the USA, as a rule of thumb, Credit Union or Mutual banks use intermediaries. If the amount to be sent is critical e.g. invoice settlement, property deposit etc, please check with the recipient as these costs may or may not be included in the amount you have been asked to send. Onlinefx cannot accept any responsibility for these charges." from OnlineFX Ltd

In some countries, it may not be possible to avoid the receiving bank charge
. "Most overseas banks make a charge to receive foreign exchange transfers. These vary from bank to bank and country to country. Some banks notably in Spain, Portugal and Italy also charge a commission of between 0.1% and 0.35% for both incoming and outgoing transfers." from OnlineFX Ltd

It is thus a very good idea to examine in detail what possibilities an FX dealer offers and what charges they will levy. In my case I discovered that with a couple of dealers I could move funds from a Canadian bank account to dealer easily and electronically at no originating bank cost. Other dealers did not offer that possibility. Moving funds from a UK bank account to a UK-based dealer could in every case I found, be done electronically and at no cost through BACS.

Fluctuating Exchange Rates
A great part of the difficulty for a person to figure out if the exchange rate they have obtained is competitive or not is the ceaseless market fluctuation of rates. If you go to a bank branch get a rate and then go home to check the rate online, e.g. at Yahoo Finance, the rate will have moved up or down in market trading. In addition, the Yahoo rates are not even trading rates, merely representative rates (it doesn't say so explicitly on the Yahoo site but I think the Yahoo rate is likely the mid-point between the buy and the sell rates for very large inter-bank transactions).


1) Yahoo online rate for CAD/GBP - 0.4995; that means 1$CAD buys £0.4995
CanadianForex (an FX dealer) live inter-bank rate at same time (more or less, within a few seconds it took me to tab to another window and hit return, so it should be pretty close) - Bid 0.4993, Ask 0.4998; Note that Yahoo's rate is more or less at the mid-point between the rate you can buy GBP with CAD and or sell GBP for CAD; the spread is 0.4998 - 0.4993 = 0.0005.

2) A few minutes later, the Yahoo rate is 0.4993 and the CanadianForex Bid is 0.4991 vs Ask 0.4996 - market prices are constantly shifting.

3) At the same moment, CanadianForex live quotes are for the Bid (the amount to buy GBP with CAD):
0.4943 for $10,000
0.4952 for $25,000
For smaller amounts, you get a lower rate - fewer GBP per CAD. The best rate is that for very large inter-bank transactions - that's the 0.4991 rate in example 2.

The Bottom Line - A Live Quote Example: these are quotes I obtained on-line or over the phone more or less simultaneously (within a few minutes) on April 7 to buy GBP using $10,000 CAD:
Multiply the rate by 10,000 and the gain on the exchange rate is £4931- £4855 = £76 or about $154 for CanadianForex and £4907 - £4855 = £52 or $105 for CustomHouse over the Bank of Montreal (BMO) at that moment.

Add in the other fees:
  • £7 that CanadianForex charges for delivering by Wire to the UK bank, and $0 for EFT uploading from the Canadian bank account, vs
  • $18.85 (c.£9) that CustomHouse charges for the delivery wire, and again $0 for EFT upload, vs
  • 0.2% of the principal amount (0.002 x $10,000), or $20 fee, plus $10 communication charge, total $30 or about £15 that BMO charges
I've left out the UK bank receiving charges in the comparison since they would be the same (e.g. at LloydsTSB it is £7 to receive a wire) in each case but that would reduce your net amount deposited into the UK bank account.

The net end-to-end advantage of CanadianForex is £162, and CustomHouse £58 compared to the transfer through BMO. The economic advantage of the FX dealer is clearly significant. Why pay extra if you don't need to?

Here's a graph from a UK-based FX dealer FirstRateFX in which they tout their comparison of themselves to some UK banks.

The costs are not the only consideration when picking which method to use to transfer funds. In the next post, I will look at items like registration, security, customer service, speed of transfer, hours of business, online vs telephone transfers and range of services.

Thursday 10 April 2008

Moving Money Around the World: Options - Cash Kiosks, Remittance Senders, FX Dealers, Banks

People who are on the move around the globe to work, to live, to study, to travel, to retire or to invest almost always need to move money from country to country as well. And they need to do it cheaply, quickly, securely and legally (of course).

I am one of those people, a Canadian who spends a lot of time in the UK with a need to convert cash from Canadian dollars (symbol CAD) to UK pound sterling (GBP). So, I asked myself, what are the alternatives to heading down to my bank branch and asking for the standard Wire (also called a telegraphic) transfer? Are there services available and how do they compare as to speed of transfer, security, telephone and Internet accessibility, hours of operation, customer service, flexibility and cost?

There appear to be four fairly distinct segments for international foreign exchange and transfers -

1) Vacation/Short-term Travel Cash - bank notes and coin exchange that are obtainable in kiosks at airports, hotels, banks and downtown tourist or business areas.

2) Remittance Providers aka Sending Money Home - primarily for migrant workers sending money from more prosperous countries to their homeland, mostly in small amounts (max about $2000). Companies in this space often have vast distribution networks of their own or agents to provide storefront face-to-face service. Some are global companies like Western Union, others are regional. Some are regulated but many are informal and operate within ethnic or national communities.

There is a very handy portal called, a non-profit UK government sponsored comparison site that shows which money transfer companies offer services and at what price between different countries. The website is an international development effort whose aim is to foster more transparent and cheaper transfers, i.e. so that more money will end up in the pockets of the recipients instead of the money transfer companies, like Western Union, MoneyGram, MoneyBookers, Tranzfers and many others, including even PayPal. In exchange for ubiquity, speed, simplicity, convenience and handling of virtually every currency, the costs are high, often amounting to 5% of the principal.

3) Foreign Exchange (FX) Dealers - these companies deal with larger amounts of money, from about $2000 upwards. The funds transferred may be for any number of purposes: the purchase of foreign property or big ticket items like boats, cars and antiques; relocation abroad or emigration; repatriation of salary from a foreign assignment; funding overseas studies, pension transfers and the like. Rarely is cash involved and most dealers won't even accept cash, unlike the Remittance category. Transfers are usually bank account to bank account, which can be a very good thing if the conduit is sure. The FX dealers' selling point against their main competition, the banks of the world, are fast, easy transfers with a lot more customer service and less cost.

Not to be confused with the FX dealers and the process of moving money are the many foreign currency trading websites and services, which are concerned with trading currencies for speculation and investment risk management.

4) Banks - Every bank in the world provides Wire transfer services as the basic method of moving cash. Secure and reliable, Wire transfers pass through the vast SWIFT network for moving funds from country to country. Banks also provide travel cash notes and coins in more or less any currency desired, even as I discovered recently, Scottish notes, instead of English notes, though both are GBP.

Some banks like HSBC have an international focus or international arm, like LloydsTSB, with accounts in multiple currencies, such as USD, EUR and GBP. Moving funds from one currency to another is easily done online or over the phone. Geared towards high cash flow and high net worth clients, there are fees accordingly (e.g. see LloydsTSB's fees for its international account). Ancillary services like tax and investment advice are typically available.

That's the lay of the land, the basic options available to move funds around. Over the next several post installments, I'll look more closely at the FX dealer option to see how it works in more detail and what the advantages and disadvantages are.

Wednesday 2 April 2008

Corporate Class Funds: Beware of Investing Only for a Tax Advantage

On March 28th, The CBC website posted an article titled Corporate Class Funds Offer Tax Advantages which extolled the virtues of these special funds whose basic aim is to allow the investor to defer the immediate payment of capital gains tax when switching funds. This is accomplished through the corporate structure, as opposed to the usual trust structure for mutual funds, which passes through capital gains to investors each year. The theory is that deferring the tax on gains assists greater long term growth, much like an RRSP does.

Hmmm, any financial advice the CBC publishes bears closer scrutiny (That the article says that these funds are "suitable for both registered and non-registered portfolios..." seems a bit crazy since registered portfolios are already tax-protected) before jumping in with investment dollars. It seems the main (only?) selling point of Corporate Class funds is the tax advantage. This alone makes me suspicious. How often does one read that one should never make an investment merely for the tax advantage?

A bit of Googling uncovers Rob Carrick's much more balanced and sensible article Investor Unbound in the Globe Advisor magazine, which describes the Corporate Class advantages and disadvantages much better. It turns out that the Corporate structure involves more costs and higher management fees, 0.2 to 0.4% per year according to Rob, reducing the net gains for the investor. The
person for whom such a structure is suitable is the high tax bracket investor who regularly makes capital gains (and no capital losses since those are not deductible) with a taxable account and who switches often between funds. Sounds like the proverbial elusive successful market timer, doesn't it?

The sidebar of Carrick's article links to another helpful Globe Advisor article by Phil De Mont, A Capital Decision, in which he cites the fact that the Corporate class funds must pay an extra tax, the capital tax. This reduces the rate of fund return by an additional 0.225% according to the article.

Taking the total return hit of about 0.5% (0.2-0.4% + 0.225%), I did a simple calculation to see the difference between the Corporate and regular funds in net after-tax returns. I assumed an investment policy more like my own, with infrequent fund switching only to re-balance. In my example, the regular fund pays capital gains tax of 20% (a high rate taxpayer with over 75k in taxable income) after a gain of $1000 on a $10000 investment in year 1and then at cash out after year 5, while the Corporate fund makes the same gain but pays tax only after year 5. The regular fund with lower fees meanwhile gains 5% a year vs the 4.5% (i.e. less 0.5%). As you can see, the regular fund comes out ahead by $168. Even for a high rate taxpayer in a taxable account, the Corporate class fund can easily be a loser under some fairly reasonable assumptions.

Add to that the inability to deduct capital losses ( will every investment be a winner?) and the incentive to frequent un-necessary fund switching that the idea of tax-deferral could easily engender, as noted in the De Mont article, reduces their attractiveness quite a bit. Caveat investor.

Tuesday 1 April 2008

Book Review: The Equity Risk Premium by Bradford Cornell

The equity risk premium is the difference between the rate of return on common stock and the return on government bonds or T-bills. For the individual investor, the amount of the premium is a critical input to investment planning for savings and for retirement. When those ubiquitous savings calculators ask for your estimate of future growth of your investments, it is important to use a realistic estimate, otherwise you may be sorely disappointed years down the road.

The objective of this book is to examine the equity risk premium in detail and come up with an answer, as the sub-title - The Long Run Future of the Stock market - suggests. Little did I know beforehand that it could be looked at from so many angles. Cornell summarizes and integrates the findings of the many financial economists who have carried out all the slicing and dicing of the data up to the 1999 date of publication. As such it is an invaluable monograph of the subject and the six pages of references provide any finance aficionado or student the core reading list to see the original material. The book itself presents little or no math, confining itself to basic formulas like the dividend discount model and the Sharpe ratio as the support for the often subtle economic logic.

The author writes clearly, carefully and directly with no embellishment and no deviation from the central topic. The style may be a bit dry but that is not a deficiency in my mind, since clarity and precision are paramount. Entertainment and pizazz are not the aim. The book did not provoke boredom, though one must keep in mind that I also read books on tax out of interest. The intended audience is intermediate to expert level.

The book seems quite linear in the progression of its argument, which is a testament to good organization of the material. There are only 217 pages in the book, including 22 pages of a table of monthly return data for US stocks, government bonds, T-bills and inflation from 1926 to 1997 (why bother with that anyhow?)

What does Cornell conclude from his review of all the evidence and studies?
"The future will not be as bright as the past. ... from 1926 to 1997, the average equity risk premium was 7.4% over treasury bonds and 9.2% over treasury bills. Investors cannot reasonably expect equities to produce such large premiums going forward. Instead, premiums are much more likely to be on the order of 300 to 400 basis points [i.e. 3 to 4%] lower."

But, he says, "... even with a lower risk premium, stocks still remain an excellent long-run investment in comparison to bonds." That's because stocks at a lower premium can reasonably do better by around 5% per year. A key reason is that stocks do better in the face of inflation.

The absolute real (after deducting inflation) expected rates of return, with the downward adjustment to equities as Cornell suggests, would work out to (using his data in table 1.3):
  • T-bills 0.5% per year
  • Long-term/ 20 year Treasury bonds - 2.5% per year
  • Equities (S&P 500) - 5 to 7.5% per year
Cornell gives advice to pension plans and individuals saving for retirement: "... fixed benefit funds face two choices: they can increase (1) funding for the plan, or (2) the fraction of the fund invested in common stocks. ... Employees on fixed-contribution plans or who are funding their own retirement plans face the same tradeoff. To achieve an expected dollar standard of living in the face of declining expected returns on equity, they must either save more or increase the fraction of their portfolio allocated to common stocks."

Apart from these core conclusions (which we ignore at our own peril), there is much else to savour in this book, which a few quotes will serve to suggest:
  • "Fama and French reported that stock returns tend to be mean reverting, so that periods of abnormally high returns tend to be followed by periods of below-aerage returns." (page 55)
  • "... in the years following 1926, when detailed stock market data became available, the United States led pretty much a charmed life. ... As of 1926, it was not clear that the future was going to be so bright." (60) ... compared to countries like Germany, France, Italy, Russia and Japan; I think of this as using Tiger Woods to portray the average golfer. Would someone please tell me whether the US will continue to be so wonderful for the equity investor?
  • "... the collapse of the gold standard led to a worldwide bias toward higher rates of inflation." (75)
  • "Given the widespread distribution and acceptance of the Ibbotson data, it is not unreasonable to assume that today's investors have significantly different beliefs than their depression-age predecessors regarding the long-run risk-return tradeoff offered by common stocks and competing fixed-income assets." (174) i.e. today's investors have a pretty rosy picture of stocks.
  • "A bubble, however, is inherently unstable. Because it is not based on fundamental valuation, all that keeps a bubble going is the expectation of higher prices next period." (185)
  • quoting then Federal Reserve chairman Alan Greenspan in 1998, "The abrupt onset of such [stock market] implosions suggests the possibility that there is a marked dividing line for confidence. When [it is] crossed, prices slip into free fall - perhaps overshooting the long term equilibrium - before markets will stabilize." (190) ... i.e. there is money to be made in market panics
One paper cited by Cornell is the paper A Century of Global Stock Markets by William Goetzmann and Philippe Jorion at the Social Science Research Network. Within that paper is the comforting information that one does not have to pick the next "USA-like superstar stock market country"... we find that the performance of a globally diversified portfolio is much closer to the performance of U.S. equities, averaging 4.0%" (they found the U.S. performance was 4.3%). Canada's real return was far behind at 3.19% and the UK's was even worse at 2.35%. Global diversification, anyone? P.S. no, I cannot explain the difference between the return numbers in this paragraph and those of Cornell cited above - no doubt there are differences in methodology like inflation calculation, time periods, adjustments of the data to compare amongst countries.

About the only criticism I have of this fine volume is its high price, $100 CAD on the dust jacket, though it sells for $47.51 on Chapters. There is also a typo in formula 3.2 on page 103 - the book shows the constant growth form of the dvidend discount model as k= Div1/(P+g) whereas it should be k=(Div1/P)+g. The text below is correct, however. My rating 4.9 out of 5.

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