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We have communicated the rules for US travel and the Substantial Presence Test in the past, but as we chat with clients we find there is still some confusion. So, with CRA and US Border Protection Services sharing information as of July 1, 2014, we thought it was a good time to revisit the rules.
We have sent this to all clients, not just the “snowbirds” whom we know travel to the US frequently, because this could be of interest to some of your friends and family. You can go to the website for the Department of Homeland Security here, which allows you to track your own days. However, please be advised that the dates they have for entry and re-entry on this website could be as much as a year out of date at this time. Track your days, and remember for regular visitors to the US the rule is more like 120 days in a year, not 180 days!
Substantial Presence Test
You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
You were physically present in the United States on 120 days in each of the years 2010, 2011, and 2012. To determine if you meet the substantial presence test for 2012, count the full 120 days of presence in 2012, 40 days in 2011 (1/3 of 120), and 20 days in 2010 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2012.
Days of Presence in the United States
You are treated as present in the United States on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial presence test.
- Days you commute to work in the United States from a residence in Canada or Mexico, if you regularly commute from Can-ada or Mexico.
- Days you are in the United States for less than 24 hours, when you are in transit between two places outside the United States.
- Days you are in the United States as a crew member of a foreign vessel.
- Days you are unable to leave the United States because of a medical condition that develops while you are in the United States.
- Days you are an exempt individual
You may have already received a letter from TD Waterhouse Institutional Services indicating the intention of National Bank Correspondent Network to acquire them sometime in the near future.
Although this comes as a surprise it is by no means a negative development. NBCN is surprisingly the leader in Institutional Services with over $50B in assets as compared to TD at $34B.
It is unclear at this time whether any re-papering will be required, but rest assured your accounts will see no disruption and when your Portfolio Manager or ourselves have other information to share we will do so. In the interim, please call or email with questions.
As we sat down to assess our clients’ portfolios at the end of the first quarter, an apparent different story was emerging from what we were reporting. Depending upon one’s bond and cash allocation, portfolios were returning between 3% and 6.9% just for the Quarter End March 31, 2013. However, by mid-April when these numbers become available, the TSX Composite Index, which is our Canadian Stock Exchange benchmark, was awash in red ink. So, what happened?
In a word, materials.
In the month of April the Materials Sector of the TSX Composite (essentially gold, mining and resource companies other than energy) was down 14.6%. This dragged down the TSX Composite Index, to minus 2.1%. Many were concerned their portfolios may have suffered the same fate but this wasn’t the case for the following three reasons:
1) TSX Sector Allocation
The large-cap dividend style means client holdings are concentrated in the following Sectors which on the whole out-performed the Composite benchmark in the month of April.
Consumer Staples +6.7%
Financial Services -1.3%
2) Geographical Diversification. US and Global Stocks had a very good month.
US (S&P 500 C$) +0.8%
Global (MSCI C$) +2.1%
3) Asset Allocation. Bond returns remained positive.
Cdn Universal Bond Index +1.1%
So despite the average Canadian Stock price having a very challenging month, your portfolio is likely flat or actually up 1%. Once again proving that much of what we hear in the media is “Much Ado About Nothing”.
Recent corporate earnings announcements are a good reminder that in the midst of many destabilizing economic problems, there remain many solid businesses with good balance sheets that are increasing their payouts to shareholders. This contrasts with the health and balance sheets of many sovereign states whose problem finances are real and seem intractable. However, while the future is unknown and the media and market intensely focus on the problems and possible solutions to come, many businesses we own in our portfolios, continue to increase dividends.
Here are some examples that have been paid in the First Quarter and announced for the Second Quarter:
BCV Asset Management Inc. has recently completed the sale of BCE Inc. and EnCana Corporation across all portfolios. Their
comments are as follows:
“The decision to sell BCE Inc. reflects our assessment that the company’s shares are now trading at fully-valued levels. BCE is Canada’s leading communications company and its shares are currently trading near the levels seen prior to the recent recession when a private equity group led by Ontario Teachers Pension Plan attempted to acquire the company. BCE has weathered the competitive impact of the new wireless competitors quite well, but increased competition in the wireless sector is invariably based on price, which eventually compresses margins and adversely impacts financial results. The federal government has publicly indicated that it wishes to see decreased wireless costs in Canada, which could lead to policy changes that are unfavourable to BCE, Rogers and Telus. BCE is also following an unproven convergence strategy through its recent purchase of CTVglobemedia. The challenges of intensified competition and an unproven convergence strategy further reinforce the valuation-based decision to sell BCE.
The decision to sell EnCana Corporation reflects both the challenges faced by the company and a decision to perform tax-loss sell-ing. Natural gas prices in the North American market have been persistently low for a number of years, while inventories remain high and shale gas drilling in the United States adds to these inventories. Export markets have little impact on the price of natural gas because there is insufficient capacity to export meaningful amounts of liquefied natural gas. While a cold winter could provide some respite to pricing, the impact would likely be short-lived, as it would encourage even more drilling. EnCana has historically hedged its production at higher prices, protecting them from lower spot prices. However, EnCana has hedged only about one-third of its production in 2012 and very little in 2013. Natural gas spot prices are lower across all future delivery months and well under 4 dollars per thousand cubic feet of natural gas, which will have an adverse impact on EnCana’s cash flow. EnCana has been slow to reduce capital spending and shift their focus from depleted gas wells, while having increasing debt levels and a significant dividend to support. EnCana has outstanding assets, but the company will be challenged if natural gas prices remain low, which we believe is a strong possibility. We will continue to follow EnCana and we could re-establish our position when the prospects for EnCana and the North American natural gas market eventually improve.
We have used the proceeds of the BCE Inc. and EnCana Corporation sales to add to existing positions Cenovus Energy Inc., Imperial Oil Ltd., Royal Bank of Canada, and Suncor Energy Inc. In the case of Royal Bank and Suncor, we have added companies that have underperformed recently, but in which we have better confidence in their near- and longer-term prospects. We have also used these transactions to increase our weighting in the energy sector and to emphasize oil over natural gas.
BCV Asset Management Inc. has also recently completed the sale of Abbott Laboratories across all portfolios.
The decision to sell Abbott Laboratories was based on the combination of Abbott’s recent announcement that they will be splitting into two companies. Abbott will split into a diversified medical products company which will retain the Abbott name and a yet-unnamed research-based pharmaceuticals company. Although this split is not expected to be completed until the end of 2012, the stock price has advanced on this news and we have used this as an opportunity to move out of the now fairly-valued Abbott.
We have used the proceeds of the Abbott Laboratories sale to add to existing positions in Medtronic Inc. and Teva Pharmaceutical Industries Ltd., as we believe these companies are undervalued at current prices.”
If you would like to discuss your personal situation further, please contact our office at 780-490-4200.