CMDF, my own toxic asset

• Updated February 4, 2010: add VenGrowth Advanced Life Sciences Fund's suspension of redemptions

LSIFs. If you're like me (poor cash drip, investment sense, et al.), years ago you loaded labour-sponsored investment funds (LSIFs) into your RRSP to claim some investment under your name via minimal actual money, and then maybe continued to do so even when the terms lost some of their appeal, and then perhaps even did a roll-over or two with whatever was left, in a futile attempt to come out ahead. Now you're probably getting out of them as soon as practically possible, moving that petty cash into something that doesn't merely recede.

But if you thought you could just mark February, future year(s) in your calendar as the expected day of Redemption (in more than one sense) and forget about it, forget it. Don't, that is.

Things are never easy with these funds. You'd think having invested in them is sufficient punishment. Keeping track of all the renamings and incestuous mergers & acquisitions makes it tough enough (what and how much can I dump this time around after the requisite 8 years?), with no need for added pain.

Festina lente. If you had CMDF (Canadian Medical Discoveries Fund — talk about discoveries...), and didn't yet know any better, you may have noticed in your portfolio its conversion last week to GrowthWorks Canadian Fund. That's all fine and dandy, you're used to this kind of thing, but come next/future February be very careful in your enthusiasm to sell. There is a heavy 35% penalty to pay if you withdraw more that 11.74% in the first, 15% in the second, and 20% in the third year following this felicitous merger. These figures are not cumulative.

This is also explained in a Morningstar article, from which I learned about the CMDF redemption freeze of last year, and that other funds are in a similar predicament. For instance, VALS (VenGrowth's Advanced Life Sciences Fund), which can no longer be redeemed, but will be wound down through annual distributions starting November 2010 and expected to last three to six years.

So I suspect, in case you own these things, that there is a good chance you were already peeved off...

TFSA, or tax-free profits for Canadians

The government of this wonderful country of Canada has introduced the new Tax-Free Savings Account (TFSA). Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA. Investment income (interest, dividends, capital gains) earned inside a TFSA account will not be taxed, not even when the funds are eventually withdrawn (though losses are not deductible either).

Canadiens, open a TFSA account with one of the soundest banks in the world:

• Royal Bank of Canada
• Canadian Imperial Bank of Commerce
• Bank of Montreal
• Toronto-Dominion Bank
• National Bank of Canada

While a primary consideration should be given to contributing to an RRSP (for the immediate tax relief), the TFSA has several attractive features. It doesn't have to be converted into anything else by age 71. It's effectively invisible (both its earned income and money withdrawn from it) in regards to federal income-sensitive benefits and credits, an important point for e.g., future recipients of OAS (Old Age Security) pension. Any amounts withdrawn can be put back in the following year(s), without affecting the regular contribution room available.

Almost everything you might want to know about TFSAs can be found on the CRA (Canada Revenue Agency) site. For instance, if you don't manage to open such an account this year, you will not lose this year's $5,000 contribution room: you can open a $10K account in 2010.

As earned income is not a prerequisite for contributing to a TFSA (unlike an RRSP), you can gift money to your spouse and/or adult children for their TFSAs. The earnings in these accounts are not attributed back to you for tax purposes.

Note that if you purchase dividend-paying US stocks (e.g., Microsoft) in your TFSA, a 15% non-resident withholding tax applies to the dividends (unlike inside an RRSP or RRIF, but like in a RESP), which cannot be recovered.

Financial Post's TFSA Centre has a few investment ideas.

Adam Smith (1723-1790), who studied moral philosophy and is being considered by many the father of modern economics, once told a learned society in Edinburgh, "Little else is requisite to carry a state to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice."