As I will need to replace my current car at about the same time, am I better off to take out a separate $10,000 auto loan to purchase a replacement vehicle or should I add the $10,000 cost to my new mortgage, thereby putting it up to $110,000? – Tom L.

However, car loans are amortized over a shorter period of time. To ensure you realize the full saving from the lower mortgage rate, I suggest you ask for a repayment schedule for a car loan. See how much more interest you would have to pay and then add that amount to your monthly mortgage payment. The net result should be considerably less cost to you. – G.P. (Jan/06)

Most Canadian income trusts do not market their product to U.S. investors, however, because of concern about the percentage of foreign ownership. If more than 50% of the shares are held outside Canada, a trust may lose its tax-privileged status. That mitigates the danger that a trust will issue new shares simply to satisfy U.S. demand.

As a result, it is unlikely that U.S. purchases will have an adverse affect on Canadians. As long as new shares are only issued to finance investments that will be accretive to investors, and not simply to meet growing demand, yield should not be compromised. The greater danger is that the underlying business will not do well, resulting in distribution cuts. We have seen a number of those in recent months and the market has punished the shares of the offending trusts by driving down their prices. – G.P. (Jan/06)

One more point. Since Tom is about to become a non-resident of Canada, he should find out what tax laws will apply to his RRSP once he leaves. Some countries, such as the U.S, offer very favourable tax treatment for Canadian RRSPs, but you have to know the rules and there are specific steps to follow. Tom should also be aware that he may not be able to make trades within the RRSP once he departs so he should be sure the money is invested for the long term. – G.P. (Jan/06)

For six months I have struggled to find employment in my field, and I am seriously contemplating returning to Asia (Thailand) to retire – cost of living being significantly lower than here in Canada.

For $100,000 I can buy a very nice beachfront condominium, the purchase of which would entitle me to residency in Thailand – and also eliminate accommodation costs. This would leave $300,000 with which to create an income stream. With no accommodation costs, I could get buy on $1,200/month (but would need this to increase at 3% annually to keep pace with inflation).

I am looking at a variety of investment options including mortgage-backed securities, income trusts, annuities, systematic withdrawal plans (SWP), etc. Is there among these options a ‘no-brainer’ safe play for someone in my situation, bearing in mind I have no need to leave any inheritance behind, and tax considerations are irrelevant for non-resident Canadians. I need my income to be 100% secure.

I will be meeting with my financial advisor in a couple of weeks to discuss this, but am concerned that being a mutual fund dealer, he will steer me toward SWP. – Marty J.

If the inflation factor didn’t come into play, your invested capital would have to yield only 4.8% to generate the $14,400 you need. That could be achieved with relatively low risk with a portfolio of high-quality corporate bonds, such as Bell Canada, supplemented by a few top-level REITs like RioCan. But that won’t provide the growth potential you need to meet your inflation-protection requirement.

This is not a unique problem. It’s the dilemma faced by everyone who wants to retire early. They may have enough money to live comfortably at the time but will it be adequate on 20 or 30 years?

So you have three choices. The first is to reduce your income needs, which means adjusting your lifestyle. The second is to take more risks with your money in the hope that it will pay off. The third is to continue working for a while and increase your capital. It’s your call from here. – G.P. (Jan/06)

In a rising interest rate environment, bond prices tend to soften (although 2005 was an exception as long-term bonds rose in value). Higher interest rates are bad news for real estate because they increase mortgage costs. Stock markets have so far been oblivious to rising rates but if economic growth begins to weaken, watch out!

That leaves cash-type securities such as Treasury bills, term deposits, bankers’ acceptances, money market funds and the like. In the past few years, they’re produced negligible returns. But as interest rates move higher, so will the yields on these short-term securities. As an added advantage, they are virtually risk-free. – G.P. (Jan/06)

However, a 6% return with limited risk is quite achievable. I suggest you start by reducing your exposure to the stock market to about 30%. Invest that money in conservatively-managed equity funds with a track record of performing well in both good and bad markets. Some of the current recommendations in my Mutual Funds Update newsletter that fit this description are CI Canadian Investment Fund, Harbour Fund, IA Canadian Conservative Equity Fund, RBC O’Shaughnessy Canadian Equity Fund, Saxon Stock Fund, Chou Associates Fund, Phillips, Hager and North Dividend Income Fund, and RBC O’Shaughnessy U.S. Value Fund.

To this, add about a 20% weighting in conservative balanced income funds, such as BMO Monthly Income or Mackenzie Sentinel Income. Invest about 40% of the portfolio in bonds of varying maturities or in bond exchange-traded funds (iUnits has two) or mutual funds. In my opinion, the various bond funds offered by Phillips, Hager and North are the best around, although TD Asset Management also has some very good ones. Hold the rest of the portfolio in a low-MER money market fund like Altamira T-Bill or directly in Treasury bills. – G.P. (Jan/06)

If you don’t want significant exposure to income trusts, you need to look carefully at the asset mix in any mutual fund you’re considering, as you have done in this case. Unfortunately, many companies don’t show trust weightings separately in their financial statements – they lump them in with equities. So you may have to do some extensive research. In a recent study published in my Mutual Funds Update newsletter, we found that BMO Monthly Income Fund had the lowest income trust exposure among the big bank income funds. So you may want to take a look at it. – G.P. (Jan/06)

You will have to pay tax at the applicable rate on any profits that you have made between the time you purchased your mutual funds and the time of the transfer. But you are correct in assuming you cannot claim any losses. Therefore, if you have a security that has lost money, you should sell it directly and not transfer it. This will produce an allowable capital loss and you can then contribute the cash from the sale to the RRSP. – G.P. (Jan/06)