Capital Yield Investments

With the market turmoil we’ve experienced over the past few years, I’m not that surprised that many feel safer holding the bulk of their portfolios is Guaranteed Investment Certificates (GICs). The problem is, your GIC portfolio may be far riskier than you realize.

Currently, two and three year GICs are paying just over 2%. Top income earners pay almost half of that back in taxes which leaves them with a net return of 1-1.2%. If you estimate inflation at around 2%, this means that your inflation adjusted return is -0.8 to -1%! So your “low risk” GIC portfolio that makes you feel safe is actually losing money each year! With the GIC rates fixed, your portfolio is guaranteed to lose. It might be time to reconsider your GIC holdings and set yourself up for success.

In order to overcome this problem, you need to earn a higher rate of return and/or pay less tax. Fortunately, there is a reasonably low risk, tax efficient solution that allows you to accomplish both. Capital Yield investment funds allow you to invest in equity securities that provide dividend and capital gain distributions instead of interest income but realize the risk and volatility of a fixed income fund. The investments hold equity securities and they enter into forward contracts in order to hedge their exposure. By doing so, they are subject to a much lower tax rate yet provide a return similar to that of a fixed income fund. In short, you get the volatility and returns of fixed income yet the favourable taxation of equities.

The fixed income, capital yield investments are actively managed bond funds that aim to outpace a GIC return while keeping the risk and volatility as low as possible. With a GIC having no chance of keeping up with inflation, these investments provide a great alternative for some people.

There is of course a cost for this and the forward contract does attract a fee. This fee however is far less than the taxation saved. Let’s take a look at an example to see how it works:

Client A is in the top marginal tax rate and they invest $100,000 in a fixed income investment that earns 4% growth in 2013. In a typical fixed income investment, they would owe $1,748 in tax and be left with $2,252 (a 2.25% net return). The same investment in a capital yield platform would earn $3,450 after the hedging costs are paid for. The total tax bill would be $754 and they would be left with an after tax return of $2,696. This equates to an advantage of $444 or almost ½ of a percent in higher returns. While ½ of a percentage point isn’t an enormous difference, it definitely adds up when you’re talking about a fixed income based portfolio.

While not right for everyone, the capital yield solutions are great tools that can help many investors protect the capital that they’ve worked so hard to build up over the years. For any investor that holds a non-registered portfolio in fixed income or GIC investments, it’s well worth taking a look at this alternative to see if it’s right for you.

Insurance products provided through multiple insurance carriers.
Mutual funds products are offered through Investia Financial Services Inc.